Signing bonus

[Tuckerlee]

My husband received a sign-on bonus in 2021 ($6,000).  He left before the contract ended in 2022.  We repaid the gross amount of $6,000 in 2023 even though net total was approx. $3,400.  A corrected W-2c has been received from the employer reflecting the withholding in boxes 3, 4, 5, and 6 which is for the FICA taxes.  The employer did refund the FICA taxes withheld for the bonus.  

I am not sure how to recoup the taxes federal and state taxes withheld on the $6,000 bonus repaid in 2023.  Since the corrected W-2 does not change the wages or state and federal withholding it seems a corrected 1040 for 2021 is not the correct way to proceed.

Please advise.  All help is appreciated!

[NCperson]

@Tuckerlee there are two choices

1) easy method, simply take an itemized deduction for $6,000 on the 2023 tax return.  This is only beneficial if you were going to itemized anyway.  

2) determine how much your tax would have changed had your earlier tax retirn not included the $6,000 signing bonus.  Whatever that result is can be taken as a tax credit on your 2023 return.

3) you can NOT simply amend the prior year tax return. 

[Tuckerlee]

Thank you for your reply.  Unfortunately itemizing will not work.  What form would be used for the repaid bonus?

[Hal_Al]

See this TurboTax article   https://ttlc.intuit.com/community/unemployment-taxes/help/what-is-a-claim-of-right-repayment/00/2153...

The employer is to be complimented for refunding the FICA. Most don't do that and then it gets even messier.

[Opus 17]

Because the amount is over $3000, you can use the Claim of Right (IRC 1341) procedure.  If the instructions in the linked article aren't detailed enough, you can post back here with more questions.  I believe you need to be using the Desktop program (Turbotax as a download or CD installed on your own Mac or PC).  I don't think the needed entry can be made in the online version.

Note that this will only address your federal income tax.  If you also paid state income tax on the bonus, you will have to do some research on your own to see if your state has a claim of right procedure and how to use it.  Turbotax customer support may be able to help with how to make the claim on your state tax return, but they don't ramp up to full staffing until January.  

[Tuckerlee]

Thank you!!

[Hal_Al]

Some states (e.g. Ohio) have a simple one line entry for "Repayment of income reported in a prior year" (or similar wording).  On others (e.g. Virginia), you may find something like "Others Subtractions  from Federal Income". 

[Mike9241]

@Tuckerlee 

since the repayment was more than $3,000 you can take a credit on your 2023 1040 as follows

for federal purposes recompute the federal taxes for 2021 by excluding the payment (you would reduce box 1 wages by the $6K). the decrease in taxes is taken as a credit on schedule 3 line 12d denote as IRC 1341. we need to know the state to determine what the laws are there 

[Tuckerlee]

Great information, thank you all for the replies.  The state is Maryland.

[feiwenw]

Hi,

I have received a sign-on bonus of $5k in 2023, and I have to pay back to the employer in 2024, due to I left the firm within 2 years. The employer refused to issue a W2 corrected form for the year of 2023. Please advise if I need to claim the credit in 2023 or wait till the tax year of 2024. Thanks

[Hal_Al]

Q. Do I  claim the credit in 2023 or wait till the tax year of 2024?

A. 2024, when you actually pay it.