Confused about W2C after repaying employer for sign-on bonus

[meow-tax]

I joined a company in 2023 and got a 50k sign on bonus. I was there for approximately 4 months so I had to return a total prorated amount of ~33k. I paid them back the "post tax" prorated amount of ~20k in the same year but they didn't cash it until 2024 so they issued me a W2C.

On the W2C:
-They reduced box 3 and 5 by ~32k which is approximately the pre-tax amount that I owed

-They reduced box 4 and 6 by a couple thousand dollars too

I'm just really confused on what my next steps are and what credits I can claim before I file my 2023 tax return, especially because box 1 on my W2C wasn't corrected.

I'd really appreciate any guidance or help on this matter, thank you so much!

[KrisD15]

Since they did not adjust Box 1 for the income, you will be taxed on the full amount.

You could argue that the employer adjust Box 1 on your W-2 but I assume they will say the repayment did not occur until 2024. 

You can claim a credit on your 2024 return for the repayment.

The way this is done is that you will get the difference in tax on your Tax Year 2024 federal return for the income you paid tax on your 2023 Tax Year return.

Before you file your 2023 return, adjust Box 1 on your W-2 to reflect the repayment and write down the tax liability (1040 line 16)

CHANGE THE W-2 BACK to how it is really reported. 

Look at your tax liability listed on your 1040 line 16.

The difference is the amount of the credit you can claim NEXT YEAR when you do your 2024 return. 

(So basically you pay too much tax this year, then get that back next year)

You may not be able to adjust for your state tax. 

YOU NEED TO USE TURBOTAX DESKTOP NEXT YEAR TO TAKE THE CREDIT.

HERE is a link for details on how to enter that credit NEXT YEAR on your 2024 return. 

[meow-tax]

Thanks @KrisD15!

So for this year when I file my 2023 taxes, should I still include and use the W2C that they sent me?

Also, if I do a claim of repayment in my 2024 tax return, how can I actually prove that I paid this amount back? In case the IRS audits me.

[MonikaK1]

Yes, use the 2023 W-2C when you prepare your 2023 return. Before finalizing and filing, take the steps recommended by @KrisD15 to determine the amount of credit to claim for 2024.

Save whatever documentation you have of the signing bonus and payback for future reference.

[meow-tax]

@KrisD15 @MonikaK1 , is there also a way to claim this tax credit for my state taxes? I live in CA.

[KrisD15]

Yes, for California it would be an adjustment on Line 21 "Other Expenses" done the same as the credit that was figured for the Federal tax. Recalculate the California State Tax paid for the prior year and take the difference on Line 21 of California 540. 

According to the State of California:

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 deduct the amount repaid from your income for the year in which you repaid it. If the amount you repaid is less than $3,000, the deduction is subject to the 2% AGI limit for California purposes. If you are deducting the repayment for California, enter the allowable deduction on line 21.

@meow-tax 

[meow-tax]

Hi @KrisD15 @MonikaK1 ,

Thank you very much for all the guidance! I think I've been able to resolve and figure out my situation.

Really appreciate all the help and support on this! 🙂