How to deduct repayment of disability benefits

[373020]

In 2019 I was overpaid by my private Long Term Disability Insurance (income included on W2).  I paid them back around $9000 in 2020.  I received a letter from the insurance company reminding me that I could claim this payment on my tax return.  I have TurboTax Premier and cannot figure out where to enter, there doesn't seem to be an applicable section in Other Deductions and Credits.

[DianeW777]

Yes, the insurance company was correct.  The information on your options and how to make the entry is provided here and it is called Claim of Right.

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 reduce your income by the amount repaid in the current tax year the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

1. Credit: If you choose to use the credit instead of the income reduction, then you would have to calculate that manually.
   • The tax return would have to be completed in the TurboTax Desktop version if the credit is used.  For assistance with this, see: How to switch from online TurboTax to the TurboTax software? and TurboTax Prior Year Products.
     1. ​​​​​​​Figure your tax for 2020 without deducting the repaid amount.
     2. Refigure your tax from the earlier year (the year you originally reported the income) without including in income the amount you repaid in 2020.
     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 2020 figured without the deduction (step 1)
2. Income Reduction Method (most common): If you choose to use the income reduction method you can use the TurboTax Online or TurboTax Desktop.​​​​​​​

Follow the steps below for the method you have selected.

Taking the Income Reduction in TurboTax

1. Login to your TurboTax account or open your tax return.
2. Click on Federal Taxes and then Deductions & Credits.
3. Locate the section Other Deductions and Credits (you may first need to click on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop version.)
4. Click Start (or Revisit) beside Other Deductible Expenses.
5. A number of questions will appear on the upcoming screens. You are looking for the one that reads Claim of right repayment over $3,000. Click yes when you see this screen. (Be sure to ignore the similar question, repayments of $3,000 or less.)
6. Enter the amount of the repayment in the box Claim of right repayment over $3,000 and click Continue.

Taking the Credit in TurboTax

There are two components to taking the credit in TurboTax. The first part entails determining the amount of the tax that was overpaid in the year the income was actually received. This requires using the TurboTax Desktop product (or another method) to determine what the tax liability would have been without the income. 

1. The credit can only be applied using the TurboTax Desktop product installed on a computer, in the Forms mode.
2. Switch to Forms mode by clicking on Forms icon in the program.
3. In the list of forms on the left click on 1040/1040RSR Wks above the Form 1040 itself.
4. Scroll down to Other Credits and Payments Smart Worksheet (near the bottom) and enter the amount that you have computed on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
5.  Click on the Step-by-Step or Easy Step icon in the upper right corner to return to the interview mode and finish working on your tax return.

[crow14]

I read the answer, and this helps. But if you use the "credit" method where exactly do reduce taxes owed? And the desktop version is the purchased turbo tax software I understand? Correct? If so, how do you do the tax change?

[ErnieS0]

You can only claim a claim of right with CD/Download @crow14.

Here's how to do it:

1. First, calculate what your 2020 tax should have been if the income was not included. 
2. In 2021 TurboTax, tap Forms in the top right
3. Tap 1040/104SR Wks in the left column
4. Go to the Other Credits and Payments Smart Worksheet below Schedule 3, line 12
5. Enter the tax difference on Line E Claim of Right, IRC 1341 credit for repayments of prior year income
6. Tap Step-by-Step in the top right to return to the interview mode