paying back sign on bonus

[douglasjia]

Hi tax professional,

I started my job in 2019 and got a sign on bonus of 5000 (after tax, I got around 3000$).

However, in 2020 I changed my job and is required to payback the 5000 sign on bonus. The company deducted 1900$ from my last pay check (this 1900$ is before tax). Then I paid 3100$ out of pocket (this 3100$ is my after tax money).

Now, I am filing the tax return for 2020. In the W2 I got from my previous company, the 1900$ deducted from my last pay check were not shown in W2 (which I think should be correct). But how should I deal with the tax issues on my 3100$ as these are my after-tax income and I paid the company back? The company did nothing to reflect this 3100$ pay back on my W2.

[KathrynG3 · Accepted solution]

To reclaim the taxes, since the amount was more than $3,000, there are two options,

Option 1: Request the former employer issue a corrected Form W-2C for 2019, removing the bonus that has not yet been subtracted. This will require amending 2019. See: How do I amend(change) a prior year?

Option 2: For 2020, file for a Section 1341 Claim of Right as either a deduction or a credit.

To enter a deduction in TurboTax Online if you are itemizing your deductions: 

• From the left menu, select Federal.
• At Deductions and Credits, scroll down to Other Deductions and Credits and click Show more.
• Other Deductible Expenses click Start

To enter a credit, you will need to convert to TurboTax CD/Download.

After the return has been converted, go to Forms Mode. Scroll down to 1040/1040SR Wks. Enter the amount of tax, which is 22%, on Schedule 3, Line 12d under Other. See the screen shot.

TurboTax explains: 

Schedule 3, Line 12 - Other Credits and Payments Smart Worksheet:

Line D - if you have a repayment treated as a credit, enter the amount allowable here. The program includes the amount on line 13, checks box 13d, and prints the text "I.R.C. 1341" to the right of box 74d. See Pub 525.

For more information, see: How Bonuses Are Taxed, and IRS Publication 525 Taxable and Nontaxable Income page 34 regarding Claim of Right.

See this IRS Customer Account Services for Specific Claims and Other issues for an explanation of both options.

[douglasjia]

Thanks for your reply Kathryn!

It seems the simplest way for me is Option 2: enter a deduction in TurboTax Online. I am using the standard deductions (married filing jointly: $24,800 for tax year 2020). Will that conflict with entering this 3100$ as itemized deduction? Or they are two different concepts?

In addition, my company is in New York City, NY and I live in New Jersey. Could you please also advise how can I get state tax returns on this 3100$?

[ErnieS0]

TurboTax will give you the higher of the standard or itemized deductions so if your standard deduction of $24,800 is higher than the sum of your itemized deductions, then none of your repayment will be separately deductible. You will just get $24,800.

New Jersey. NJ allows you to deduct any repayment made in 2020 against other wages. Refer to Claim of Right Repayment Refunds (IRC 1341). Enter this amount in Other Wage Adjustments – W2 as a negative amount.

New York. Include Form IT-257 Claim of Right Credit on your NY return.

• Go to Take a look at New York credits and taxes
• Scroll down to Other Tax Credits
• Start Less Common Credits
• On Uncommon Credits, select Claim of Right Credit (IT-257)

[douglasjia]

Thanks Ernie! Does this mean I won't be able to get back the federal tax return on this 3100$, but can get back the state tax return on this 3100$?

[ErnieS0]

@douglasjia You can claim your repayment as a tax credit on your federal return if the deduction does not lower your tax.

It takes some work. Figure out what your tax would have been without the bonus and claim the difference as a credit on your 2020 tax. For example, if your 2019 tax liability was $10,000 with the bonus and $9,000 without it, then you would enter a $1,000 tax credit on your 2020 return.

If you used TurboTax last year, you can “amend” your return and subtract $3,100 off your W-2 to figure your tax liability without the bonus.

Then enter the tax difference in TurboTax. You will need the CD\Desktop version. Champ @Hal_Al explains how in How do I claim a Claim of Right CREDIT (not as a deductible expense) on TurboTax? I see the option i...

[douglasjia]

Got you. Do I need to provide any evidence to IRS that I paid the 3100$ bonus back to my company?

In addition, is there anyway that I can do it with online version? I find the desktop version turbox is really difficult to use...

Another question, can I submit my tax return online if I have to use desktop/download version? I don't want to print out my tax return forms and mail it...

[Cynthiad66]

No.  You do not have to provide the evidence when filing.  However, if IRS should ask for it at a later date you may be required to submit proof.

[danfly09]

I have the same issue... Nevertheless, it seems that in 2020 IRS released a provision to treat bonuses repaid in the year after as taxable income and then treat them as an itemized deduction in the next year. 
Please correct me if I'm wrong, because that would be totally unfair. I don't think that I would be able to surpass the standard deduction if I go with itemized deductions even using my repayment. 

[JamesG1]

If you received taxable income in 2020 and paid all or a portion back in 2021, you qualify for a claim of right repayment.

Payment of an amount of $3,000 or more may be made by a deduction or credit on the 2021 Federal 1040 tax return.  Computation of the credit option is outlined here by KristinaK.

A claim of right repayment occurs when a taxpayer is required to repay income that they had reported and paid tax on in a previous tax year. The repayment must be of funds that, when received, the taxpayer had a reasonable belief he or she had unrestricted access to.

If you have an amount of $3,000 or less, follow these steps.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Did you have any of these less common expenses? select Repayments of $3,000 or less.

If you have an amount of $3,000 or more, follow these steps to report a deduction on line 16 of Schedule A Itemized Deductions.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Tell us about your other expenses, select Claim of right repayment over $3,000.

@danfly09

[duquanfeng]

Hi Kathryn, I followed your instruction and calculated the credit. Do i need to include the copy of w2-c(corrected w2 for year of 2020) from previous employer when i file the tax for 2021? 

[DawnC]

No.  You do not have to provide the evidence when filing.  However, if IRS should ask for it at a later date you may be required to submit proof.     @duquanfeng

[sansh76]

Hi @KathrynG3 ,

      When I applied the deduction option 1, the online software added my deduction as repayment to the government for unemployment repayment, not to employer repayment. Any idea why?

To enter a deduction in TurboTax Online if you are itemizing your deductions: 

• From the left menu, select Federal.
• At Deductions and Credits, scroll down to Other Deductions and Credits and click Show more.
• Other Deductible Expenses click Start

[shubham-123]

Thanks. I am trying this. 

For calculating refund from last year, e.g. 2019 in your example, in turbotax, should I reduce the wages in box 1, 3 and 5 in W2 of any one employer by [Amount that I repayed in 2020]? And then at the top left, check what refund it shows? This is the refund amount that I would use as the credit for 2020, when I actually repaid the amount.

Is that right understanding?

[ThomasM125]

Yes, you can adjust a W-2 entry to reflect the correct wage income since you will end up reporting the correct amount of wages that would have been reported if you had not received the additional income in the first place. @Subham-123