Company overpaid me in 2022 but only fixed mistake in 2023

[user7654321]

My company overpaid me in 2022. The total gross overpayment was approx $30,000.

I informed my company of this problem in 2022. The problem could have been corrected in 2022 but it wasn't. Instead, it was corrected in 2023.

I gave a repayment check in 2023 for approx $24,000.

Did I have too much Federal Income tax witheld in 2022 because of this? If yes, am I entitled to receive any of it back through a 2023 refund?

[DianeW777]

Not exactly.  You didn't have too much withheld in 2022 because it was based on the 2022 income at the time.  However what you do have is called a 'Claim of Right'.  This means you can claim a deduction or a credit on your tax return in 2023, repayment year, for money you were taxed on in a previous year.

The Claim of Right is explained more in the article below.  However I will add some information here about how to report on your tax return to determine if it applies to you and how you prefer to enter it on your tax return.

• What is a claim of right repayment?

Claim of Right

• If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year if the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

Taking the Income Reduction in TurboTax (most common)

1. Login to your TurboTax account or open your tax return.
2. Click on Deductions & Credits
3. Locate the section Other Deductions and Credits (you may first need to select on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop.)
4. Click Start (or Revisit) beside Other Deductible Expenses.
5. A number of questions will appear on the upcoming screens. You are looking for the one that reads Claim of right repayment over $3,000. Click yes when you see this screen. (Be sure to ignore the similar question, repayments of $3,000 or less.)
6. Enter the amount of the repayment in the box Claim of right repayment over $3,000 and click Continue.

Taking the Credit in TurboTax (Must use TurboTax Desktop)  How to switch from online TurboTax to the TurboTax software? 

There are two components to taking the credit in TurboTax. The first part entails determining the amount of the tax that was overpaid in the year the income was received. This requires using the TurboTax Desktop product (or another method) to determine what the tax liability would have been without the income. 

1. The credit can only be applied using the TurboTax Desktop product installed on a computer, in the Forms mode.
2. Switch to Forms mode by clicking on Forms icon in the program.
3. In the list of forms on the left click on 1040/1040RSR Wks above the Form 1040 itself.
4. Scroll down to Other Credits and Payments Smart Worksheet (near the bottom) and enter the amount that you have computed on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
5.  Click on the Step-by-Step or Easy Step icon in the upper right corner to return to the interview mode and finish working on your tax return.

[user7654321]

Adding this claim changed nothing on my tax return refund.

I'm trying to understand if I lost money because of this. If my overall take home pay was lower because of this. For example, if this was all corrected in 2022, does that mean that I could have gotten a refund? Versus 2023 when it doesn't change anything?

What if my net income for 2022 was for example $110,000 and gross income was $140,000. And, the federal income tax deduction was $20,000. If the gross income overpayment was $30,000 and the paid back amount was $24,000, how would that have been different?

I'm confused as to whether I lost any after-tax income because of this because of the years the mistake happened and the year it was corrected.

If it doesn't make any difference which year each part of this situation happened as it relates to my take home net income that's what I'd like to know. Asked yet another way I'd also like to know if because of the way the errors were corrected, if I for example I lost $6,000 in my take home pay that I will never be able to recover.

[AmyC]

All of your questions have one thing in common, the 2022 return. This tell me you didn't  properly follow the steps to do the IRC 1341 because you have to go into the previous year's taxes, look at the tax liability, removed the income, look at the new tax liability. The difference is what goes on this year's tax return. The fact that you are asking "what if" tells me you did not do this so you could not have added the difference to this year's return.

Please follow these steps:

1. Go to 2022 return
2. Save of copy of your 2022 return.
3. Look at the tax on your income - make note of the number.
4. Choose to add a state to get into the program.
5. Subtract out the paid back income,
6. Find the difference in tax liability by subtracting the new amount from the original return.
7. Close out the 2022 return

Go into 2023 using the desktop version - enter the credit.

Input that number for your tax credit as shown in the post above

 See What is a Claim of Right Repayment.

The IRS 1341 goes to sch 3 and reduces your tax liability by the same amount that it would have in 2022. Therefore, if you had a much smaller tax liability in 2023, it would not have the same effect.

See Repayments in Pub 525. Once you have completed these steps, you will see the changes and know how you are affected.