My employer says I was overpaid in a prior year, and that in 2018 I repaid the debt through a payroll deduction. How to handle in TurboTax?

[clobber88]

My employer sent me a form letter certifying that I had been overpaid $450 in a prior tax year (did not specify), and that this amount had been repaid in 2018.

I am unsure how to handle this situation. IRS Pub 525 warns that, "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."

Likewise, TurboTax 2018 "Other Deductible Expenses" allows me to enter the amount as a repayment under $3000. However, upon completion of the section, my taxes due does not change and a pop up appears saying the Standard Deduction is still correct for me.

Is this correct? I have paid tax on the the $450 and am unable to reclaim?

[MichaelMc]

If your employer was taking payroll deductions in 2018 to correct a prior year overpayment, I would hope that the deductions were taken on a pre-tax basis, as an adjustment to your wages, so that the wages shown on your 2018 Form W-2 would be reduced by the amount of the adjustment and you would pay less tax, to compensate for your prior year taxes. If this was not done, you should discuss the matter with your employer.

As far as deducting your repayment, I must warn you that repayment of a debt has never been an allowable deduction. While payment of interest on various type of debt (such as mortgages) has been deductible, repayment of the principal amount is not permitted.

You are also correct in saying that the Miscellaneous Itemized Deductions category no longer exists (through 2025), though this would not help you for reasons cited above.

[clobber88]

It is my understanding from multiple sources that a repayment in a year after the overpayment comes out as gross, but not pre-tax. That is my overpayment in 2017 (I think) was $450 and I was taxed on that. The repayment was $450 in 2018 and was not pre-tax: <a rel="nofollow" target="_blank" href="https://tax.thomsonreuters.com/blog/overpayments-and-repayments/">https://tax.thomsonreuters.com/blo...>

The same link says, "The employee can, however, claim a deduction on their personal income tax return for the tax they repaid."

However, it seems that the new tax law did away with the deduction: <a rel="nofollow" target="_blank" href="https://www.ey.com/Publication/vwLUAssets/ey-managing-wage-repayments/$FILE/ey-managing-wage-repayme...>

It would appear this is really messed up.

[rbc88]

I am in the same situation, about to repay an overpayment of over $2000. Could it really be true that I am forced to pay taxes on money I am giving back, just because it is less than $3000?? I'm hoping we are misunderstanding this and someone can weigh in with good news...

[frannyglass]

What happened in the end?

[rbc88]

Yep, I ended up paying taxes on money that I gave back :(

[JohnW152]

That’s correct, per the tax law.

When the amount of a repayment is $3,000 or less, you won’t be able to claim a deduction for your repayment. 

Repayments of $3,000 or less used to be deductible on your return as a miscellaneous itemized deduction.  However, for tax years beginning after 2017, you can no longer claim any miscellaneous itemized deductions.  

Please see the CAUTION under the Repayments section in the IRS’ Publication 525, Taxable and Nontaxable Income for more information.

@rbc88