topic Dear traceyrhering: Internal Revenue Code (IRC) Section 1... in Get your taxes done using TurboTax

What is the IRC 1341 repayment credit in layman's terms?

traceyrhering — Fri, 31 May 2019 23:49:23 GMT

Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

GeoffreyG — Fri, 31 May 2019 23:49:25 GMT

Dear traceyrhering:

Internal Revenue Code (IRC) Section 1341 repayment credit is one of the two options that a taxpayer has (the other being a tax deduction) when the taxpayer is faced with a situation known as a Claim of Right.

A Claim of Right is, in simple layman's terms, basically the case where a taxpayer reported income as being taxable in one year, but then has to repay it back in a future tax year. An example of this would be where a retired person receives a pension payment during 2009, and then in 2013 receives a letter from the pension administrator informing them that an internal audit of the pension computer system revealed that the administrator made a mistake and overpaid benefits in 2009. As such, they now want the pension recipient to repay (the overpayment) by writing a check back to the pension plan. And as odd as that sounds, a variation of that very same thing happened to my own (retired) mother a few years ago.

But, the interesting tax "quirk" is that since the taxpayer already paid 2009 income taxes on the pension payment (which it turns out they weren't legally entitled to keep, after all), then there has to be a mechanism to make the taxpayer whole. Thus arises the concept of a Claim of Right, where the IRC 1341 is one of the two choices, as I've mentioned above.

Hopefully that helps you to understand the basics.

Now then, a taxpayer can either claim a deduction or a credit for this repayment, and here's how it works mechanically . . .

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction. The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repayment over $3,000. If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction ). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.

Method 1. Figure your tax for 2013 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2. Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.

Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1).

If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71.

If you choose a deduction, please enter it here:

Federal taxes - Deductions & credits - I'll choose what I work on - Other deductions and credits - Other deductible expense

Please answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Please enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

If you choose a credit (This can only be done in the Forms mode of the Desktop version of TurboTax), please enter it here:

FORMS - F1040 - Below line 70 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 71.

I've included a link to the IRS website for your reference:

http://www.irs.gov/publications/p525/ar02.html#en_US_2013_publink1000229600

Thanks for asking this important question, and good luck to you!

Regards

Thanks for the info!

traceyrhering — Fri, 31 May 2019 23:49:26 GMT

Thanks for the info!

You're very welcome. That's why we're here! :-)

GeoffreyG — Fri, 31 May 2019 23:49:28 GMT

You're very welcome. That's why we're here! 🙂

So if I received over $3000 in 2013 and repaid over $3000...

Chesca55 — Fri, 31 May 2019 23:49:29 GMT

So if I received over $3000 in 2013 and repaid over $3000 in 2014 and I wanted to choose the tax credit, do I fill in line 71 for 2014's tax return or amend 2013's tax return to include that credit?

The instructions are to claim a credit for taxes paid in...

rcwachman — Fri, 31 May 2019 23:49:31 GMT

The instructions are to claim a credit for taxes paid in the year you repaid the income, so that would be 2014 in your case.

I understand there have been changes in Turbotax for this...

omeropee — Fri, 31 May 2019 23:49:34 GMT

I understand there have been changes in Turbotax for this year. I want to make sure before buying the desktop version. Is the forms mode available to edit Line 71 to enter repayment amount for IRC Section 1341 on 1040?

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

phsinc3 — Tue, 05 Nov 2019 23:31:46 GMT

How if any does this take new treatment for 2019 for SSA retirement benefits repaid i n 2018 but not posted by SSA until 2019?

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

DLMCPA — Tue, 08 Dec 2020 17:50:04 GMT

How did that turn out? Did you have issues process the credit at the service center?

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

DanielV01 — Tue, 08 Dec 2020 18:36:25 GMT

@DLMCPA You are actually responding to an older post, that is likely even older than the date stamp on the post. If you have a new question on this subject, you may want to post a new question to get fresh eyes on the subject.

As far as processing the credit is concerned, all of that is ultimately determined by the IRS. They can ask for proof regarding any tax claim, and for this particular subject may be more prone to do so. As with anything tax, accurate records are the key to responding to an IRS questions.

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

ajpaschke — Fri, 08 Jan 2021 16:32:54 GMT

I'd like to take an IRC 1341 deduction on my 2020 Federal Income Taxes for $5,000 of Unemployment Compensation paid and reported in 2019, then repaid in 2020, as a result of losing an appeal with the State of Missouri. Using TurboTax, with the current Federal tax forms, what are the instructions to document this on the tax forms, so I receive the tax credit?

For my Missouri Income Taxes, do I amend my 2019 Missouri Income Taxes or take a deduction similar to an IRC 1341 on my 2020 Missouri Income Taxes? If I take a deduction similar to an IRC 1341 on my 2020 Missouri Income Taxes, again using Turbo Tax, what are the instructions to document this, so I receive the tax credit?

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

Irene2805 — Thu, 14 Jan 2021 00:00:28 GMT

If the amount you repaid was more than $3,000, you can deduct the income you repaid on your 2020 tax return. [It is not a credit.] To do this, please follow these steps:

Click on Federal Taxes > Deductions & Credits [In TT Self-Employed: Personal > Deductions & Credits > I'll choose what I work on].
Scroll down to the Other Deductions and Credits and click on the Start/Revisit box next to Other Deductible Expenses.
On the next screen, Did you have any of these less common expenses, click the No box.
On the screen, Did you have any of these other expenses click the Yes box. [The list includes Claim of right repayment over $3,000.]
On the next screen, Tell us about your other expenses
Enter the amount of the Unemployment Compensation you repaid.

The amount will appear on Schedule A, line 16.

Missouri does not have a claim of right doctrine similar to the Internal Revenue Service. However, claiming the IRC 1341 deduction on your federal return reduces your taxable federal income, which, in turn, reduces your MO taxable income.

@ajpaschke

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

facts — Thu, 14 Jan 2021 23:54:06 GMT

is this a refundable credit? thanks

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

DMarkM1 — Fri, 15 Jan 2021 00:11:16 GMT

No. The "claim of right repayment" is a deduction from income not a credit.

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

ajpaschke — Tue, 19 Jan 2021 16:49:20 GMT

You are saying that a Claim of Right Repayment (IRC 1341) can be taken exclusively as a miscellaneous income deduction on Schedule A, Line 16, which is entered on Line 33 of the Miscellaneous Itemized Deductions Worksheet. What is the Claim of Right Repayment (IRC 1341) tax credit on Schedule 3, Line 12D, which is entered on Section A, Line 12D of the 1040/1040SR Worksheet? My income repayment was $3,000+.

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

ErnieS0 — Tue, 19 Jan 2021 18:26:45 GMT

As @GeoffreyG stated, if you are repaying more than $3,000 you have the option of either taking a miscellaneous itemized deduction or a tax credit.

For tax years beginning after 2017, you can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, you aren’t able to deduct it from your income in the year you repaid it.

The Claim of Right Repayment (IRC 1341) tax credit on Schedule 3, Line 12D is the credit for the prior year tax that was paid due to the income repaid, i.e. it is the difference between the tax with and without the repaid income.

See Repayments.

Re: What is the IRC 1341 repayment credit in layman's terms?

LCM — Mon, 01 Feb 2021 18:51:33 GMT

My repayment is less than $3,000. Where do I input this amount? It was an overpayment of a bonus from the prior year that was repaid this year.

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

LCM — Mon, 01 Feb 2021 19:32:52 GMT

So just to clarify, if my employer (the US Government) made a mistake and overpaid a bonus to me by $2,500, I will be stuck paying tax on it twice? I haven't had much success in trying to them to rectify the situation. Any suggestions?

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

AmyC — Tue, 02 Feb 2021 01:18:49 GMT

Unfortunately, the itemized deduction for amounts less than $3,000 is not available since the TCJA took effect in 2018. The only real option is to pay it back without a tax benefit.

Re: Dear traceyrhering: Internal Revenue Code (IRC) Section 1...

CSKcpa56 — Thu, 10 Jun 2021 18:55:01 GMT

I have a question I can't find an answer to.

If income in 2019 is overstated because in 2020 the TP had to repay it - why can't 2019 be amended to reduce the income in that year? I'm looking at helping a person who included income on their 2019 return - paid say $4,000 in taxes on it. Now 2020 comes along and he has to repay half of it. Would the TP get a refundable credit of $2,000 on the 2020 return? The 2020 return shows only retirement income and social security so when the standard deduction is put in the TP has zero income and zero taxes. Thanks!