Bonus Repayment Question - W2c / Claim of Right

[eled34]

Hello,

I have a random tax question. I was paid a bonus of $40,000 in the 2019 tax year, which was clawed back when I quit my job (~$24,000 net payment clawed back to the $40,000 gross payment). I repaid the gross bonus in 2020 and the company claims it is unable to adjust my wages and tax withholdings in a W-2c for 2019 per IRS guidelines. So, my tax adviser recommended filing a "claim of right" for my 2020 return; however, I am not planning to earn any income in 2020. Can anyone please advise if it is possible to receive the money (about $16,000) in a refund if I file in 2020, even with no income? Hope this is clear.

Thank you!

[DaveF1006]

To claim a right of repayment which is what this is, you need to declare it in the year you repaid it. In this case, you need to declare it in 2020 as an itemized deduction.  If you do not plan on earning any income in 2020, you have no taxable income to reduce from the itemized deduction thus you will be able to take advantage of the deduction. 

[eled34]

Thanks, Dave! Apologies, as I read your comment you said that I WILL be able to use the deduction in 2020 despite not having any income to deduct. Can you please confirm that is what you meant? I really hope to get my money back as soon as possible as it is a significant amount for me (~$16,000).

[RobertG]

Dave is correct, you will be able to get a benefit from the repayment, but you will have to claim it as a refundable credit on Form 1040 Schedule 3 to do so.

You will need the desktop/download version of TurboTax to claim the credit.

Here is how you do that in TurboTax, courtesy of  Critter.  You will use method 2, because itemized deductions won't help you.

Repayment over $3,000.    If the amount you repaid was more than $3,000, you can recover the tax you originally paid using one of two methods. You can do it as a deduction on schedule A or a tax credit on Schedule 3 line 13 of the 1040 form.

Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

Method 1.    Claiming a deduction for the repaid amount. You deduct it as a miscellaneous itemized deduction on Schedule A  line 28.

This is the flow in TurboTax: 
Federal taxes > Deductions & credits > I'll choose what I work on > Other deductions and credits > Other deductible expense>Go thru to third screen> answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"
Enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

Method 2.    Figure your tax claiming a credit for the repaid amount. Follow these steps.

1.      Figure your tax without deducting the repaid amount.

2.      Refigure your tax from the earlier year without including the income that you had to repaid.

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

 This is the flow in TurboTax (This can only be done in the Forms mode of the Desktop version of TurboTax)

Go to FORMS (top right of main screen) > Schedule 3 > Enter the amount on Part II Line 13 d
This credit should show up on Form 1040 Schedule 3, line 13d
I've included a link to the IRS website for your reference: http://www.irs.gov/publications/p525/ar02.html#en_US_2014_publink1000229605

This method is shown in IRS publication 525 as example 40 on page 35.

@DaveF1006

[eled34]

Can't thank you enough! So it sounds like I'll be able to get the money back as early as January or February 2021, even without any income in 2020.

[eled34]

Robert and Dave,

Thanks again for your help. I wanted to confirm that I can and will receive the tax credit/refund mentioned above if I file a form 1040 for 2020, even with zero income? As it appears to me, I will simply enter zero's for all the income sections of the 1040 and fill in the relevant credits (ie. line 73 of the 1040)? 

I have been living with my parents and studying/traveling all year and need to confirm if I can reliably budget the ~$16,000 mentioned above for my 2021 financial planning.

Thank you!!

Eric

[Critter-3]

Do NOT NOT NOT plan on the refund showing up on any certain date and you will not be disappointed ... your return could take 6 months or more to process not just 21 days just because  you need the money... Murphy's Law in full force. 

[eled34]

Got it, thanks Critter! Yes, I have a decent safety cushion planned in for next year already but do just want to confirm that  I should reasonably expect to get the money back even if I have no income on my 1040?

It would provide a bit more comfort knowing that, even if it takes a while, I am definitely going to get the money back at some point...

[Critter-3]

Yes ... it is a refundable credit. 

[Hal_Al]

It's not clear how you calculated a $16,000 credit.

The credit is not the amount you paid back. The credit is the  amount calculated on re-figuring your tax liability for the year of the repayment. 

It's also not clear when you paid it back, 2019 or 2020, or some in each, and how much.  What  I'm reading is  you only paid back $24,000 in 2020.  Depending on your tax rate, that would equate to a tax  credit of $2500 to $5500, maybe less.   You cannot claim that credit until you file your 2020 tax return, early in 2021.

The credit going on line 73 of form 1040 is the "old way" (prior to 2018).  It's now line 13 of Schedule 3, which transfers to line 18d of form 1040.

If you repaid some of it in 2019, the company is wrong; they should have been able to adjust your W-2.  Even if they didn't, a repayment, in 2019 (the year the bonus was paid) is handled differently  (not a claim of right) than a repayment in 2020.

[Critter-3]

And it part of the repayment include the FICA taxes? 

[Hal_Al]

Q. And does part of the repayment include the FICA taxes? 

A. I don't know, for a fact, but I don't believe so.  It's not part of the line 13 (schedule 3) calculation and I don't think there's anywhere else to claim a  FICA refund. 

[Critter-3]

@Hal_Al 

Q was posed to the OP however I don't think they can use the form 843 if the original amount included FICA : 

https://www.irs.gov/individuals/international-taxpayers/social-security-tax-medicare-tax-and-self-em...

[Opus 17]

On the federal tax return you can only take the claim of right credit for your federal taxes. I agree that $16,000 sounds way too high. There will be a separate claim of right process for your state tax return. And you can’t use your federal tax return to claim a refund of Social Security and Medicare withholding, that goes on a different form that is filed separately.

Also note that you will not be able to e-file a federal tax return if you have no income. It will have to be printed, and mailed in.

I strongly urge that you have a professional and prepare your return next year, as I am concerned that there are facts that we are missing and $16,000 is probably way too high.

It is also important to understand that you cannot use the claim of right credit unless you can argue that you had a reasonable belief that you had an unrestricted right to the bonus income when you received it in 2019.  In the case of a bonus that is contingent on you working a certain number of months to keep it, the IRS could argue that you knew when you received it that you did not have an unrestricted use of the money until after meeting the contingency period.  If the IRS decides to audit to you, they could also look at your intentions in taking the job and then changing jobs before the end of the contingency period.  If there is any way that they could look at the situation and determine that you knew or should have known that you did not have an unrestricted right to this money, they may take the credit away from you.

The other way to recover taxes on a wage repayment is with a special itemized deduction, and this does not require that you had an unrestricted right to the money, but it would require that you had other income and deductions large enough to make the itemized deduction pay off. It sounds like you won’t have income for 2020?  I strongly recommend professional assistance when you prepare your claim of right on your 2020 tax return.

[eled34]

Thank you all for the discussion and the feedback! Hopefully, the situation is not as complicated as I may have made it sound. I simply received a promotion bonus in 2019 of $40,000 pre-tax. I quit my job in 2019 to travel and, therefore, have had no income since then and will have no income for the year of 2020. I was required to repay this bonus to my old employer at the pre-tax amount ($40,000) because I left within one year of receiving the bonus. I made this $40,000 repayment in January 2020 despite only receiving the net ~$24,000 in 2019.

So, I am hoping to recover most of the overpaid ~$16,000 if I file a return/claim of right for the year 2020.

Hopefully, my tax adviser will be able to assist the mechanics of how to complete the relevant paperwork.