This past year (2019) I received an overpayment from SS going back to 2015, along with a repayment requirement to LTD carrier in 2019. So, overpayment and repayment occurred in same year, with overpayment spanning five years. My questions are:
1. The letter I received from LTD shows that I paid the money back and the breakdown (because technically I already paid the taxes on this when I put into the system and in 2015-2018) and I had to enter adjusted income for Social Security for 2015-2018 and I want to make sure I'm not missing something and not entering anything else. (i.e. A form that states LTD company, breakdown, etc.)
2. I entered repayment over $3,000. amount and that's all. Is that all I need? (It's a decent chunk.) Where does that eventually show up and is that impacted by the 2% rule or is it a straight deduction? (It's just when I review things at a glance, it looks like an unemployment thing, and it's not. I want to make sure it shows up in the correct area.
The deduction goes on line 16 of schedule A; not subject to the old 2% rule. But it is only an itemized deduction. If you normally use the standard deduction, you may not see much benefit.
If you took it as a credit, it shows up on schedule 3. It is a time consuming method that requires re-figuring your taxes from the prior year. The IRS says:
Method 1. Deduction on Schedule A
Figure your tax for the year of repayment claiming a deduction for the repaid amount.
Method 2. Credit on Schedule 3
Figure your tax for the year of repayment claiming a credit for the repaid amount. Follow these steps.
Figure your tax for the year of repayment without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in the year of repayment.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for the year of repayment figured without the deduction (step 1).
For 2018, you filed a return and reported your income on the cash method. In 2019, you repaid $5,000 included in your 2018 income under a claim of right. Your filing status in 2019 and 2018 is single. Your income and tax for both years are as follows:
With Income Without Income
Taxable Income$15,000 $10,000
Tax$ 1,613 $ 1,013
Without Deduction With Deduction
Taxable Income$49,950 $44,950
Tax$ 6,853 $ 5,753
Your tax under method 1 is $5,753. Your tax under method 2 is $6,253, figured as follows:
Tax previously determined for 2018 $1,613
Less: Tax as refigured − 1,013
Decrease in 2018 tax $ 600
Regular tax liability for 2019 $6,853
Less: Decrease in 2018 ta − 600
Refigured tax for 2019 $6,253
You pay less tax using method 1, so you should take a deduction for the repayment in 2019.
In your case, since you span multiple years, you have to figure each of those years and the amounts that were in those years. I had an audit case this summer that covered multiple years of repayment and it was a good bit of work.
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This situation is described in IRS Publication 525. If the amount is more than $3000, you can take a itemized deduction, on line 16 of schedule A (not subject to the old 2% rule) or you can take a credit. The credit is computed by re-figuring the tax from the previous year(s) as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return. TT does not do the credit calculation or compare it to the alternate deduction. You enter the credit in the forms mode (the forms mode is not available in the on-line versions of TurboTax[TT]). All entries that seem like you should be able to enter on Form 1040 or Schedules 1 through 3 have to be entered on TurboTax's 1040 Worksheet. Scroll way down to Other Credits and Payments Smart Worksheet. Select item D, claim of right under IRC 1341 for repayments. It ends up on line 13 of schedule 3.
So, the taxpayer has the option of either claiming the credit or deducting the repayment as an other itemized deduction, whichever provides the greater benefit. But, you cannot file an amended prior year return.
If the amount is $3,000 or less, no deduction or credit is allowed.