In 2020 I got $20k retention bonus to stay 2 more years. I quit after 1 year and had to pay back $10k. How can I get the taxes for those 10k back?

[rjs]

In what year did you pay back the $10,000? You have to get the adjustment for the tax on your tax return for the year that you paid it back.

Since the amount you repaid was more than $3,000, you have a choice of two ways to handle it. The first, and simplest way is to claim an itemized deduction for the amount of the repayment. But that doesn't help you unless you have enough other itemized deductions to make your total itemized deductions, including the repayment, more than your standard deduction. If your total itemized deductions, including the repayment, are not more than your standard deduction, you do not get any benefit from the deduction.

If you simply enter the repayment in TurboTax, it will use the itemized deduction method, whether or not it give you any tax benefit. You would enter it under Other Deductions and Credits > Other Deductible Expenses.

• The first screen asks if you paid any generation-skipping taxes. If you didn't, click No.
• The next screen asks if you had any "less common expenses," one of which is repayments of $3,000 or less. You repaid more than $3,000, so click No.
• The next screen asks if you have certain other expenses. Click Yes.
• On the next screen, enter the total amount that you repaid in the second box, labeled "Claim of right repayment over $3,000." Then click Continue.
• The deduction will appear on Schedule A line 16.

The second, more complicated option is to claim an "IRC 1341" credit, which would directly reduce your tax for the year of the repayment. If you would get some benefit from the itemized deduction, you should try both options and use the one that makes your tax lower. You can read all the details of both options under "Repayments" in IRS Publication 525. The discussion in Publication 525 calls the itemized deduction "method 1" and the credit "method 2."

TurboTax will not calculate the credit for you, or compare the deduction and credit to see which is better. You have to do all the calculations yourself.

To calculate the credit (method 2) you have to recalculate your 2020 tax return. You can't do that in TurboTax Online. If you used TurboTax Online for 2020 you would have to download your .tax2020 data file, then use the CD/Download TurboTax software for 2020 to do the recalculation. You could either call customer service and ask for a free download of the 2020 software, or use the free 2020 amend software, even though you are not actually amending your 2020 tax return. You don't file the recalculated 2020 return.

If the credit works out better, there is one more complication. There is no way to enter the credit in TurboTax Online, because it's not covered in the TurboTax interview. It can only be entered in forms mode, which is only available in the CD/Download TurboTax software. So you would have to use the CD/Download software for the year of the repayment as well.

To enter the credit in forms mode, open the "Form 1040 or Form 1040-SR Worksheet." Scroll down to the "Other Credits and Payments Smart Worksheet" near the bottom. Enter the credit that you calculated on line D of the "Other Credits and Payments Smart Worksheet." The repayment will then appear on Schedule 3 line 13d, "Credit for repayment of amounts included in income from earlier years."

[DawnC · Accepted solution]

You have a Claim of Right to file.    There are 2 ways to get those taxes back, either a credit or a deduction.   The credit takes a few more steps, but it is generally more valuable.   You can only take the deduction (easier) if you itemize taxes.   Please see this Help Article which details the steps for both options.   

[Opus 17]

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@rjs wrote:

In what year did you pay back the $10,000? You have to get the adjustment for the tax on your tax return for the year that you paid it back.

Further information.

There should also be a claim of right process on your state tax return, but you will have to do some research on that, if you want to adjust your state income taxes.

Lastly, we have to think about social security and Medicare tax.  For a $10,000 bonus you would pay $620 of social security and $145 of Medicare tax, unless your total income was more than $137,700, which was the social security wage base for 2020.  Suppose the employer asked you to repay $9235.  In that case, you are whole with respect to social security and Medicare tax.  However, if your employer asked you to repay the $10,000 gross, then you are owed a refund of $765 social security and Medicare tax.  (Note that if your income was more than $137,700 even after considering the repayment, you didn't pay SS tax and are only entitled to a $145 medicare tax refund.)

To get that refund, you need to file form 843.  You need documentation of the fact that you paid SS and medicare tax on those wages, and you need a letter from the employer confirming that the employer will not be obtaining an adjustment or refund for you.   Form 843 is not supported by Turbotax and is not part of your regular tax return, you can file it at any time.

https://www.irs.gov/forms-pubs/about-form-843