topic Repayment of 3rd Party Disability Benefits in Deductions & credits

Repayment of 3rd Party Disability Benefits

slapshot2006 — Tue, 16 Mar 2021 16:30:45 GMT

I received a letter from my 3rd party disability insurer that stated: I may be able to recover taxes that I paid on benefits I originally received in previous years and then repaid to my insurer in 2019.

I assume that I have to file an amended return for 2019, correct? I am a TurboTax Online user.

How exactly do I handle this on the amended 2019 return? (Deduction or a Credit?) I'm not totally clear after reading IRS Pub. 525, ugh!

Thanks in advance!

Re: Repayment of 3rd Party Disability Benefits

ToddL99 — Tue, 16 Mar 2021 17:16:03 GMT

Yes, if you made the repayment in 2019, you will have to amend 2019 to get credit for that repayment. The process is cumbersome and, depending on the amount your repaid, you may want to seek assistance from a CPA.

You can either claim a deduction or a credit for this repayment. ("Credits" are usually more beneficial and do not require you to itemize. You will also need a desktop (CD/Download) version of TurboTax).

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 2019 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 2019 claiming a credit for the repaid amount. Follow these steps.

Figure your tax for 2019 without deducting the repaid amount.
Refigure your tax from the earlier year (year you received the employer payments) without including in income the amount you repaid in 2019
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 2019 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 31.

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 30 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 31.

I've included a link to the IRS website for your reference:
Publication 525 (2020), Taxable and Nontaxable Income

Re: Repayment of 3rd Party Disability Benefits

slapshot2006 — Tue, 16 Mar 2021 19:25:47 GMT

Thanks so much for your quick response!

To answer your question about how much I repaid, it was $63,900.

But, also on the letter from my insurer, it reminds me that the benefits that I previously received were submitted as income on a W2 with only 36% of the benefits being taxable.

So they're saying that I can only submit: 36% of $63,900, or $23,004 for a potential 2019 tax deduction

I did itemize my deductions in 2019. I do not have the desktop version of TurboTax.

So, the first question for me: is choosing the credit method still more beneficial than the deduction method given the fact that I would have to purchase TurboTax Desktop?

And, the second question: is this too complicated to do on my own and will I need a CPA or tax attorney?

Your thoughts?

Thanks!

Re: Repayment of 3rd Party Disability Benefits

JoannaB2 — Tue, 16 Mar 2021 23:26:24 GMT

Yes, claiming a credit under IRC 1341, Claim of Right may be more beneficial. The steps below may help you figure the credit:

Login to TurboTax desktop version.
Click on Forms in the upper right hand of the screen.
Scroll down on the Forms in my Return column on the left hand side and click 1040/1040 SR WKS.
Scroll down all the way on the 1040/1040 SR WKS until you get to Other Payments and Credit Smart Worksheet at the bottom of the page.
Enter the amount on Line D, Claim of Right, IRC 1341.
Click on Step by Step in the upper right hand of the screen.

See link, Claim of Right, for more information.

Re: Repayment of 3rd Party Disability Benefits

slapshot2006 — Wed, 17 Mar 2021 12:48:29 GMT

Thanks so much! I'll give it a go!

Re: Repayment of 3rd Party Disability Benefits

slapshot2006 — Wed, 14 Apr 2021 22:11:51 GMT

Hello,

Thanks for your help with this Repayment on my federal taxes. Do you know if I can claim this on my PA state taxes?

Regards,

Leo

Re: Repayment of 3rd Party Disability Benefits

DaveF1006 — Thu, 15 Apr 2021 22:53:58 GMT

No. Pa does not allow a credit for a Claim of Right, IRC 1341.