"Can I deduct the amount repaid from my income when I file my 2016 tax return?"
Yes under the "claim of rights" doctrine you claim the repayment as either a tax credit this year or as an itemized deduction.
If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040) on your 2016 income tax return. As you paid more than $3,000 you might think this doesn't apply to you, but it might, so read on.
If during the year you repaid more than $3,000 you can also deduct this on Schedule A but, alternatively, you can take a tax credit for the year of repayment this year, whichever provides the most benefit. In order to claim a credit you'll need to be able to re-figure your 2015 income taxes without those overpayments included. You then take the difference between what you actually paid in taxes in 2015 and what you should have paid in taxes without the overpayments and claim that amount as an income tax credit on your 2016 Form 1040.
So, you have two methods of handling the repayment in your taxes:
Method 1 - Itemized Deduction
Figure the tax for the current tax year, claiming a deduction for the repaid amount. Repaid wages must be deducted as a miscellaneous itemized deduction.
Method 2 - Credit for prior year taxes paid
Figure the tax for the current year claiming a credit for the repaid amount following these steps.
"Can I deduct the amount repaid from my income when I file my 2016 tax return?"
Yes under the "claim of rights" doctrine you claim the repayment as either a tax credit this year or as an itemized deduction.
If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040) on your 2016 income tax return. As you paid more than $3,000 you might think this doesn't apply to you, but it might, so read on.
If during the year you repaid more than $3,000 you can also deduct this on Schedule A but, alternatively, you can take a tax credit for the year of repayment this year, whichever provides the most benefit. In order to claim a credit you'll need to be able to re-figure your 2015 income taxes without those overpayments included. You then take the difference between what you actually paid in taxes in 2015 and what you should have paid in taxes without the overpayments and claim that amount as an income tax credit on your 2016 Form 1040.
So, you have two methods of handling the repayment in your taxes:
Method 1 - Itemized Deduction
Figure the tax for the current tax year, claiming a deduction for the repaid amount. Repaid wages must be deducted as a miscellaneous itemized deduction.
Method 2 - Credit for prior year taxes paid
Figure the tax for the current year claiming a credit for the repaid amount following these steps.
Can you clarify the step 2 of Method 2? How can I refigure the last year's tax? Should I use desktop version of last year's Turbo Tax? Let's say I repaid 50K, then what should I change, is that taxable income in W2? Thanks!!
Yes, you need to use a desktop version at this point. For purposes of calculating the prior year's taxes you remove it from where ever it originally was recorded.
Thanks. Regarding 1, what do you mean exactly about "this year's tax"? Is it what I already paid, or what I supposed to pay? How can I know it from Turbo Tax? Sorry it seems like a really basic question.
Assuming "Regarding 1" refers to "Method 1 - Itemized Deduction" then in the context of the original question that would be 2016.
I typically don't itemize my deductions, and if even with my repayment deduction, my itemized deductions total is still less than $24,800, it appears that using Method 1 would not provide any additional tax benefit (i.e., I would still be taking the standard deduction). Am I understanding this correctly?