How do I report a claim of right for 2021 on my California state return?

[steve1441]

I repaid my signing bonus from 2019 in 2020 (gross payment incl. tax). There is a way to get a tax credit on federal return. How do I get tax credit on CA state return?

Last year I filed state taxes for 3 states - NY, NJ and CA. How do I get tax credit for returning the bonus amount back to my employer?

[LenaH]

You could use a "claim of right" Section 1341 credit, but only if the repayment was more than $3,000. This is a federal tax credit for taxpayers who reported income in the previous year, but have to repay the income because it was paid in error. The Section 1341 credit is found on your 1040, Schedule 3. 

For the method on how to calculate your amounts for Schedule 3, please see Publication 525 and go to page 35. Please keep in mind that these Section 1341 credits do tend to get examined by the IRS, so it is important to keep all of your documentation in order in case the calculations get questioned. 

This credit is available on the state side as well. However, I am not sure which state you allocated the bonus to on your three state returns, so I would be able to instruct you with the state side of your question once I know the allocation used. 

[steve1441]

Thanks for the reply. The bonus was applied to California wages.

Please suggest how to get credit from California state for the bonus repaid.

[DianeW777 · Accepted solution]

For California the instructions for CA Adjustments are printed here for your convenience. Whether you used this bonus repayment as a deduction or a credit, you will apply it the same way on the CA return.

Schedule CA-Line 16 - Other Itemized Deductions - Claim of Right

If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, 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 take a credit against your tax for the year in which you repaid it, whichever results in the least tax.

If the amount repaid was not taxed by California, no deduction or credit is allowed. 

If you claimed a credit for the repayment on your federal tax return and are deducting the repayment for California, enter the allowable deduction on line 16, column C.

If you deducted the repayment on your federal tax return and are taking a credit for California, enter the amount of the federal deduction on line 16, column B.

To help you determine whether to take a credit or deduction, see the Repayment section of federal Publication 525, Taxable and Nontaxable Income.

Note: Remember to use the California tax rate in your computations. If you choose to take the credit instead of the deduction for California, add the credit amount on line 78, the total payment line, of the Form 540. To the left of the total, write “IRC 1341” and the amount of the credit.

Taking the credit will require TurboTax Desktop.

[Peter-X]

Hello Diane, 

Does 540NR has a place for claim of right? I guess it is special credits line 58, but not 100% sure. If you can confirm or correct it, it will be great.  

Thanks!  

@DianeW777 

[DianeW777]

Per the California instructions:  If you choose to take the credit instead of the deduction for California, add the credit amount on line 88, the total payment line, of the Form 540NR. To the left of the total, write "IRC 1341" and the amount of the credit.

You may need to use TurboTax Desktop to enter the amount of the credit or print and mail your tax return by adding it before you mail.

• How do I switch from TurboTax Online to TurboTax CD/Download?

@Peter-X