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Repayment of Sign on bonus - Credit

I was given a sign on bonus in the end of 2021, but ended up leaving my job this year and will now have to repay that bonus. 

 

The bonus is >$20k and so far I have repaid the non-tax portion of the bonus. My former employer is requiring full repayment before issuing a W2c. 

 

Considering that I have the option of filing for a claim of right. Is it possible to file that prior to repaying the tax portion of what is owed? I'm looking to avoid having to come out of pocket to pay back the taxes. 

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1 Best answer

Accepted Solutions
rjs
Level 15
Level 15

Repayment of Sign on bonus - Credit

You can only take the claim of right credit on your tax return for the year that you repaid the income. You can't file the credit separately. So on your 2022 tax return, that you file in 2023, you can get the claim of right credit for the amount that you repaid in 2022. The credit will be included in the refund from your 2022 tax return, so you won't get the money until sometime in 2023. If you are waiting for that before you repay the remainder, you won't be able to complete the repayment until 2023. Then you would have to claim another credit on your 2023 tax return, that you file in 2024, for the amount that you repay in 2023. (Calculating that credit on your 2023 tax return would be extra complicated because you would have to take into account the credit that you already claimed in 2022.) If the remaining amount that you repay in 2023 is $3,000 or less, you would not be able to claim any credit or deduction for it.


Also keep in mind that the credit is just an approximation of the income tax that you paid on the amount that you repay. It is not the full amount that you repay. Furthermore, you do not get a separate payment for the claim of right credit. It's just applied as a credit towards your total tax for the year that you claim it (2022). Depending on your overall tax situation, the refund on your 2022 tax return could be less than the amount of the claim of right credit.


My gut feeling is that your proposed plan is not a good idea. It's too complicated, and it delays the final resolution of the situation for a year. I would suggest that you do whatever you have to do to complete the repayment this year.

 

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3 Replies
rjs
Level 15
Level 15

Repayment of Sign on bonus - Credit

You can only take the claim of right credit on your tax return for the year that you repaid the income. You can't file the credit separately. So on your 2022 tax return, that you file in 2023, you can get the claim of right credit for the amount that you repaid in 2022. The credit will be included in the refund from your 2022 tax return, so you won't get the money until sometime in 2023. If you are waiting for that before you repay the remainder, you won't be able to complete the repayment until 2023. Then you would have to claim another credit on your 2023 tax return, that you file in 2024, for the amount that you repay in 2023. (Calculating that credit on your 2023 tax return would be extra complicated because you would have to take into account the credit that you already claimed in 2022.) If the remaining amount that you repay in 2023 is $3,000 or less, you would not be able to claim any credit or deduction for it.


Also keep in mind that the credit is just an approximation of the income tax that you paid on the amount that you repay. It is not the full amount that you repay. Furthermore, you do not get a separate payment for the claim of right credit. It's just applied as a credit towards your total tax for the year that you claim it (2022). Depending on your overall tax situation, the refund on your 2022 tax return could be less than the amount of the claim of right credit.


My gut feeling is that your proposed plan is not a good idea. It's too complicated, and it delays the final resolution of the situation for a year. I would suggest that you do whatever you have to do to complete the repayment this year.

 

Repayment of Sign on bonus - Credit

Thanks for the quick response! I suspected this would be the answer. 

Repayment of Sign on bonus - Credit

And just to make sure your employer is doing it correctly ... you shouldn't be repaying your employer any of the Social Security or regular Medicare taxes that were withheld from your pay (your employer will be amending their returns to get that refunded to them, which is why they need to issue you the W-2c to show the reduced Social Security and Medicare).

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