I was paid a retention bonus in Aug 2021 with the condition that I will have to repay if I leave within 12 months. Tax was witheld on that bonus payment. I later decided to leave the company in Apr 2022 and am now required to repay the retention bonus. My current W2 includes this bonus as compensation. How do I handle this situation from a tax filing perspective?
You will have to report the W-2 including the bonus on your 2021 tax return.
In 2022, when you repay the bonus, you will make a claim of right repayment.
If your repayment is less than $3,000, you'll claim it as a Miscellaneous itemized deduction in Schedule A.
If the repayment is more than $3,000, please read this TurboTax Help topic on how to make the claim.
Thank you for you reply. I have not yet filed my tax returns yet. I could potentially repay the bonus before I file my taxes for 2021. Would that change the scenario? What would I need from my employer in this case, a corrected W2?
You could possibly if your employer will issue a corrected 2021 W2, excluding the bonus payment. If not, you will need to follow the advice given by MinhT1 given in the previous post.
@ljazGoher
My employer came back with the following comment.
"Since you had access to this payment in 2021, you will not receive a 2021 W2C. The repayment was received in 2022 so the W2C is needed in 2023 for 2022 income. I'm waiting for confirmation that the IRS ruling on prior year overpayments hasn't changed but you won't be receiving a W2C for 2021."
I guess I have to then go with the claim of right approach. Thank you for the help!