Salary over payment in 2015 was paid back in 2016. How do I deal with it on my 2016 taxes?

[Schoie]

I was overpaid in 2015. I paid the gross amount, post tax back in 2016. I have a receipt of over payment. How do I file this with my 2016 taxes?

[Phillip1 · Accepted solution]

You have three options.

1. Repayments of under 3,000 dollars can be deducted as a miscellaneous deduction subject to the 2% limitation.

2. Repayments of over 3,000 dollars can be deducted as a miscellaneous deduction that is not subject to the 2% limitation; or

3. You can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right.

You will need to use the following methods to calculate the credit and to choose between the credit and a deduction.

Method 1.   Figure your tax for 2016 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 2016 claiming a credit for the repaid amount. Follow these steps.

1. Figure your tax for 2016 without deducting the repaid amount.

2. Refigure your tax from the earlier year without including in income the amount you repaid in 2016.

3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.

4. Subtract the answer in (3) from the tax for 2016 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 73, by adding the amount of the credit to any other credits on this line, and see the instructions there.

 An example of this computation can be found in Pub. 525.

If you need to claim the credit, you will need to switch to the desktop version of the program. The credit is entered directly into forms on line 54 form 1040. Enter IRC 1341 next to line 54 c with the amount.

To claim the deduction, follow this path:

1. Go to the Federal Taxes category.

2. Go to the Deductions and Credits subcategory.

3. Choose the I’ll choose what I work on option.

4. In the list of Your Deductions and Credits, scroll to the Other Deductions and Credits section.

5. Click no on the generation-skipping taxes

6. If the repayment was less than 3,000 dollars, click yes on Less Common Expenses and enter repayment and the amount.

7. If the repayment was more than 3,000 dollars, click no on Less Common Expenses and yes on Any Other Deductions. Enter the expense next to Claim of Right Repayment (only if over 3,000 dollars).

[dongwm]

A further question.   Use this case as an example, is it possible to refile a correction of the 2015 tax return in 2016  if the 2015 income was much higher?

[dmertz]

No, this is not permitted to be handled by amending the 2015 tax return.

The 2015 tax return must continue to agree with the income reported on the W-2 issued by the employer.  This situation does not result in a corrected W-2 being issued.