Repayment IRC 1341 for money I was paid in 2019 that I had to pay back in 2020

[taxgal428]

I am looking for assistance here.  Trying to figure out repayment credit or deduction for 2020 tax year. Figuring out if Method 1 or Method 2 to go with.  I am Single filer - no dependents and under 65.

In 2019 I was paid $18384 in third party sick pay via W2 and another W2 for $342.  I also collected a pension for $1141. Total Income for $19867 minus schedule A $14037 = taxable income $5830 tax =583. I had to pay $687 for that year.  In 2020 I had to pay back $18384 which I did.  So now in my 2019, I figured the tax without the $18384 and my results are Tax = 0.  Now when I look at pub 525. I calculated the  tax with and without that $18384 for 2019.  With sick pay tax= $583 without sick pay tax = 0.  In 2020 I had a W2 for $1666 and Social Security for $45176 which results in no social security being taxable. So total income is $1666 now minus my schedule A $13470 equaling = negative so tax return stops calculating and if I include the $18384 in 2020 as a deduction my Schedule A comes to $31854, again results in no taxable income and tax = 0.  Looking at pub 525 and comparing methods not sure if I am due a credit of $583 on my 2020 return or since I have no taxable income to begin with, I am not allowed to take the credit.

2019:

Taxable Income: $5830  (with sick pay minus schedule A)

Tax: $583

2019:

Taxable Income: 0 (without sick pay)

Tax: 0

2020

Taxable Income: 0 (with IRC 1341 deduction added to schedule A)

Tax: 0

2020

Taxable Income: 0 (without IRC 1341 repayment)

Tax: 0

2019

Tax previously determined: $583

Less: Tax as refigured:   $0

Decrease in 2019 Tax $583

2020

Regular tax liability for 2020: $0

Less: Decrease in 2019 tax: $583

Refigured tax for 2020:  $-583.00 (negative)

Am I allowed to take the $583 on my 2020 tax return or because it results to a negative number I am not allowed to take it.

thanks in advance for your assistance.  I know its a long message but I did not want to leave anything out.

taxgal428

[LenaH · Accepted solution]

Yes. The "claim of right" Section 1341 credit is either deducted as a miscellaneous deduction on Schedule A, Form 1040 or it is used to determine a credit that can be entered on Schedule 3 (Form 1040), whichever is most beneficial. Since you have no 2020 income, you would qualify to take it on Schedule 3 as a refundable credit. 

To enter, please follow the instructions below:

1. Open your return.
2. Click on Federal.
3. Click on Deductions and Credits.
4. Scroll down to Other Deductions and Credits and Click Start next to Other Deductible Expenses.
5. Answer Yes to the question Did you have any of these other expenses?
6. Enter the amount in Claim of repayment over $3,000.

I have attached screenshots below for additional guidance. 

[taxgal428]

thank you very much!