Repayment ofPrior Year's Income Overpayment

[imsusan22]

In 2019 I had to repay approx. $20K in money that the government said they overpaid me in 2008.  This was repayment of income that I paid taxes on.  Can I deduct this income from my 2019 taxes since I had to repay the money to the government?

[ColeenD3]

How is this a repayment of income that you paid taxes on? If the IRS gave you too much money and you then gave it back to them, it is not deductible.

[imsusan22]

Thanks for your reply, let me clarify.  I did not get the money from IRS.  I received it as part of my salary in 2008 from my employer (the Federal Government). I paid taxes on it at that time.  I got a notice last year that I had to pay the money back.  Part of it was done as a garnishment. 

[JohnB5677 · Accepted solution]

A Claim of Right occurs when a taxpayer reported income as being taxable in one year, but then has to repay more than $3000 of that income back in a future tax year.

To enter this as a deduction in TurboTax

• Go to Deductions and Credits
• Under Other Deductions and Credits
• Next to Other Deductible Expenses select Start
• Select No until you get to the screen that says Tell us about your other expenses
• Claim of right repayment is on this screen

Enter your repayment.

Also please see this link: Claim of Right

[asolovey]

Hello:

I have a similar situation but my over payment happened in December 2018, the repayment was done in February 2020 and the amount was less than $3000. The repayment was the gross amount, hence I lost some federal and state taxes. How can I recover them?

Thanks!

[DianeC958]

If the amount is less than $3,000 you cannot recover the taxes paid.  To have a Claim of Right repayment the amount repaid has to be greater than $3,000.

[asolovey]

This is unfair. Did IRS set this limit? How convenient. I bet it brings a lot of revenue to them every year. Is there any other way to recover the taxes?

[BillM223]

The $3,000 limit is set by the U.S. Congress in the U.S. Tax Code, section 1341.

To change this amount, please contact your U.S. Representative and your two Senators and ask them to change Section 1341(a)(3).

[nickl1]

I have a similar situation.  I had to pay back 2019 income due to an employer error.  Had I caught it before Jan 1st, they would have deposited my check as a net pay adjustment, and then made all of the corresponding corrections to my gross pay (including Social Security, Medicare, Federal Income Tax, State Income Tax, City Income Tax, Deferred Comp, etc) AND issued me a corrected W-2 to reflect all of the necessary changes.  

Because no action was taken until after Jan 1, 2020 I had to repay the net amount and their response was to talk to my accountant.  I figured there would be an easy way to do an offset to income returned in Turbo Tax.  After looking at Pub 525 I was obviously very wrong. 

Here is a hypothetical that is pretty close to my situation.  I left my employer in November but they failed to remove me from their payroll system.  My net income is direct deposited.  I didn't notice it until between Christmas and New Years.  No one there could answer my question and said they'd call me back in January.  I paid back the entire net amount the first week of January, 2020.  They sent me a letter acknowledging that this was their error that I could use when doing my taxes. 

Based on $7,000 of gross wages, I received $4,000 of net income.

Q1)  Since I repaid in January, any adjustment has to wait until I file my 2020 returns next year, correct?

Q2)  The only way I could adjust against 2019 income is if I'm doing an accrual method, which my employer has never done.  (December work days paid in January count as January income).  Am I missing anything that would allow me the flexibility of using the accrual method or any other adjustment to claim against the 2019 income?  (I think no.)

Q3)  This now has to be claimed as an itemized deduction in 2020, correct?

Q4)  By claiming as a deduction, it will not reduce my Medicare or Social Security obligations in the current year, meaning I have now paid $535 more than I otherwise would have over the two years.  Correct?

Q5)  If this deduction doesn't push me above the standard deduction of $24,000 for Married Filing Jointly, claiming it will not help me recoup any of the taxes (Federal, State, or Local) I paid in 2019, meaning I will be out all of the taxes I paid on the income I ultimately received none of.  Correct?

Q6) Relatively speaking, I suppose I should be happy since the error forced me to pay back more than $3,000.  Had it been less there would have been no chance to recoup any of the overpayment of taxes. (I guess that's more of a comment than a question!)

Thank you for your help!!!!

@DianeC958 

@BillM223 

@JohnB5677 

[AmyC]

@nickl1

1. Yes, repayment in 2020 means tax return for 2020

2. You are a cash basis taxpayer, no accrual for you.

3. No, you can claim it as a credit since it is over $3,000

4. The final amount of wages repaid on your letter should include those credits.

5. You want to use the credit, not the deduction.

6. Here are the two methods for figuring your deduction or credit. While you are doing your 2019 taxes, go ahead and determine you tax liability minus the money so when you do your taxes next year, you know the amount of credit allowed.

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

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 for 2019.

2.      Refigure your tax for 2019 without including the income that you had to repay. 

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

IRC 1341 is the Internal Revenue Code allowing this. For an example, see another answer of mine at Example of Repaid Funds.  Here is the IRS pub 525 link really far down, repayments over $3,000.