Correct repayment amount when claiming the tax credit for the overpayment

[fieldcoil]

Hi there,

 I was notified by my former employer that I was overpaid in 2023 by their mistake. The gross pay amount is around $5200 and the net pay amount is around $3100. I repaid them the amount of net pay ($3100) in 2024.

I am preparing my 2024 tax return and want to claim the tax credit for the repayment since the amount of the repayment is greater than $3000. My question is which is the correct amount, $5200 or $3100, when I determine the overpaid tax in 2023? 

Thanks!

[maglib]

@fieldcoil 

it  depends how your employer handled the mess, if they adjusted their taxes paid to the govt in 2023 or 2024.

If they adjusted payments to taxing authorities in 2023, they should have issued you a revised 2023 W-2 and you would need to prepare an amended tax return for 2023.  They should also pay to do this return as it is their error.

If they did it in 2024, then Your employer should have issued your W-2 this year reflective of what you refunded them, which then would show reduced wages this year and less taxes paid as you are a cash basis taxpayer. 

I'm so sorry this happened to you.

Good luck.

[fieldcoil]

Hi @maglib ,

Thank you for your reply. 

They did it in 2024 and didn't issue any W-2 form for 2024 since I have left the company in 2023. They did  provide me a W-2C for 2023.  However, they didn't update the box 1 (Wages) and box 2 (Federal tax withheld) but updated box 3 (social security wages) and box 5 (Medicare wages) by subtracting the gross pay ($5200) and box 4 & 6 accordingly.

I found this document. And I believe it is suitable for my situation. 
What is a claim of right repayment?

However, I am a little confused with the step 7 of Taking the Credit in TurboTax Desktop:

7. Adjust the income you originally reported by subtracting the amount you repaid. For example, if you reported $50,000 in income, but had to repay $9,000, you'll adjust the income to $41,000.

I am not sure if I should put $5200 (gross pay) or $3100 (net pay) for the repayment amount.

[fieldcoil]

The forum messed the link in my previous replay.

It is the first result if you search "What is a claim of right repayment? turbotax" in google:

https://www.google.com/search?q=What+is+a+claim+of+right+repayment%3F+turbotax&sca_esv=6777f8812b5ea...

[DianeW777 · Accepted solution]

You will the gross and not the net pay when you calculate the tax that would have been used if the income had not been included on the original return. Continue to follow the steps for the credit to be applied.

• 8. After you enter the updated income, TurboTax will automatically calculate your updated tax liability. To determine your Claim of Right Credit, subtract the amount of the updated tax liability from the original tax liability.

Next, you’ll apply the credit. To do this, you’ll need the current year of TurboTax Desktop.

Applying the credit

1. Return to the current tax year (the credit can only be applied using the Forms mode in TurboTax Desktop).
2. Select Forms.
3. Choose 1040/1040SR Wks from the list and the worksheet will appear.
4. Scroll to the Other Credits and Payments Smart Worksheet (you can find this in a box near the end of the worksheet).
5. Enter the credit amount you calculated on Line D, Claim of Right, IRC 1341 credit for repayments of prior year income.
6. Select the Step-by-Step or Easy Step icon to return to the interview mode and finish working on your tax return.
   • What is a claim of right repayment? 

@fieldcoil 

[fieldcoil]

Thank you @DianeW777 for answering my question!