2020 Pension plan repayment in 2021

[lindastr]

My husband passed away in November 2020.  His regular pension payment was received on December 1.  His 2021 1099-R included all twelve payments.

In January 2021 the pension fund deducted that December overpayment from my survivor benefit.  I then received a letter from the pension fund telling me that I should use a deduction or credit since they cannot reduce the gross income for a prior tax year.

Here's a part of that letter.

CalPERS has received your repayment of $757.85 in 2021 to be applied to the Service Retirement overpayment issued after the date of death of Joel K Straus. All of this repayment may be used as a deduction or a credit on Joel K Straus's previous tax return(s) since CalPERS cannot reduce the gross income for a prior tax year. 

IRS Revenue Ruling 2002-84 provides that, for overpayments repaid in the same tax year in which the overpayment was incurred, the repayment amount reduces the recipient's gross income for that year. However, for overpayments repaid via lump sum in a tax year subsequent to the year(s) in which the overpayments were incurred, the recipient may be entitled to a deduction under IRC section 165(a) on his/her individual tax return, but the repayment amount would not reduce the amount of the recipient's gross income reported for any previous tax year(s). 

I just don't understand what I am supposed to do.

In which tax year does the deduction or credit go?

And where exactly does it go on the return?

[ThomasM125]

Section 165(a) refers to deducting the overpayment on your itemized deduction schedule as a casualty loss. Do you itemize your deductions?

[lindastr]

I don't know yet if 2020 return will itemize deductions.  In the past, some years have itemized and some years have not.

Are you saying that this credit belongs on the 2020 return?  As a casualty loss?

[ThomasM125 · Accepted solution]

Section 165(a) does mention casualty losses, but also allows a deduction for trade or business losses and losses in any transaction entered into for profit. So, in your case, you would normally be allowed an itemized deduction for the loss, as a miscellaneous itemized deduction.

However, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the deduction until the year 2026. So, even if you do itemize your deductions in 2020, you will not be able to take a deduction for the repayment under current law. 

If the amount had exceeded $3,000, you could take a credit for the additional tax you paid in 2019 on your 2020 tax return. However, that is not the case here it seems.