Claim of Right Repayment - Virginia State Tax

[volta88]

In 2019, I made a repayment of 2018 wages (over $3k). 

I took a credit on my 2019 federal tax return via the Claim of Right Doctrine (IRC § 1341) for the amount of taxes related to this repayment.  I would like to take a similar credit on my Virginia state tax return. Does anyone know which worksheet/line I should use to apply this credit?

[MaryK4 · Accepted solution]

There is not a handy way to enter in Turbo Tax, and the state of Virginia requires you to attach the computation of how the Claim of Right credit was calculated for both federal and state, so you would have to mail the return with the worksheets.

Note: The amount of tax benefit derived from the repayment must be included on the line of the Virginia return designated for Virginia income tax withheld, which is Line 26.  To enter this in Turbo Tax, you would have to enter as a state estimated payment in the Federal Deductions and Credits section.  See The" claim of right doctrine" is directly tied to IRC treatment

[volta88]

Brilliant. Thank you so much!

[arsdean]

Have a related question. So if you take a Claim of Right Repayment credit for income repaid in 2021 on federal and State (Virginia), does it preclude you from e-filing? My understanding is that you can still efile federal and State if you do a Claim of Right repayment itemized deduction, but if you do a credit instead you are unable to e-file and need to mail the returns in. Can someone confirm please? I don't want the added hassle of mailing the return. 

[DianeW777]

Yes, you will need to mail your tax return if you use the credit.  The credit requires manually calculation and entry which is like an override and will not allow e-file. If you use the itemized deductions you will be allowed to e-file.

@arsdean

[arsdean]

Thanks Diane, appreciate it

[bornintheusa1986]

In the same situation as OP.

Did you manage to figure out how to get the credit for VA state taxes?

[volta88]

Hello!

Yes, VA Dept of Taxation finally accepted our return with the credit. We had no issues with the federal return (although it took IRS 2.5 years to process it during the pandemic).

For the federal return, we followed the steps under "Taking the credit in TurboTax CD/Download" at this link:

What is a claim of right repayment? 

For the VA return, we followed MaryK's advice above (logging the credit as an Estimated Payment) and mailed in the return; however, VA initially rejected it. Long story short, it was rejected due to a combination of the following reasons: 1) the credit amount was not actually an estimated payment; 2) the schedule we submitted showing how the credit was calculated was likely not in the format they needed; and 3) IRS had not yet processed our federal return. So, they argued there was nothing to 'back up' this credit.

Ultimately, the following steps worked for us with the Virginia return:
1) Follow MaryK's advice above.
2) Attach a line-by-line spreadsheet with all amounts from the prior year VA Form 760, columns to include: Line No., Line Description, Original Amount, Refigured Amount Net of Repayment, and Difference (Original vs. Refigured Amount).
3) If possible, attach a copy of your IRS Record of Account transcript for that year, evidencing that your federal return with a similar credit was processed. Granted, this may not be available when you file due to IRS processing times.

Best of luck! Getting the Virginia situation sorted out was so stressful for us, but ultimately it was the line-by-line spreadsheet (#2) that helped us most. We even tried enlisting the help of a tax pro, but weren't able to find anyone who was familiar or willing to help with this situation.

[bornintheusa1986]

Volta88, 

Thank you very much for your detailed reply. I will follow the steps you outlined.

I'm glad you were finally able to get your refund. Hopefully TurboTax software can calculate and file Federal and State credits in our situation automatically in future.

[bornintheusa1986]

Following the guide under applying credit (Federal).  I have followed the previous steps and have calculated the adjusted taxes and credit due.

Could someone help regarding step 5 and 6. 

Step:

5) Enter the adjusted amount of tax paid on line H, Other payments or credits

6) Enter the credit amount you calculated on line E, Claim of Right, IRC 1341 credit for repayments of prior year income

Are we supposed to enter either step 5 or 6 or both? 

What is the difference between step 5 and 6?

It seems to me that step 6 is all that is needed and leaving step 5 blank is appropriate. 

Thanks. 

[DawnC]

Yes, that is correct.  To apply the credit using the 2022 (current) TurboTax desktop software, enter the amount of the credit you previously figured ($450 in this example) on Line D and TurboTax will automatically fill in Line d, right below that, see image below.   @bornintheusa1986.