How do I do a claim of rights repayment on money paid to State for mothers debt?

[rjfleener-msn-co]

Repayment was from mothers PERS. Account was paid to me as part of small estate affidavit.

[KrisD15]

Please clarify,

If this was given to you as a small estate affidavit, it would have been treated as an inheritance, and therefore not taxable. 

Since this was not reportable/taxable income, there would be no deduction for a claim of rights repayment. 

REPAYMENT is for income that was claimed in one year and then paid back in another. You did not get income from the state, or anyone whom you had to pay back. 

[rjfleener-msn-co]

I received a 1099R with my SSN number on it.  I assumed that it needs to be considered income.  The IRS did withhold 20%.  As soon as I enter it into Turbo Tax it counts it as income.  How do I show this as inheritance and not taxable income?  As far as one year to the next.  The check was received and cashed in 2022 and the payment to Oregon DHS was made in 2023.  The payment was because the state was requested payment as mom was under their care.  Thank you for your assistance.  This is a twist that I am having trouble seeing clearly.

[DianeW777]

A retirement distribution to a beneficiary is taxable income.  You must report the income on your 2022 tax return.

When the repayment was made for your Mother's state bill, the question is whether you were liable for the payment.  This will be important to use the 'Claim of Right' in 2023, when the repayment occurred.

If your Mother was still living when the distribution occurred, then it should be reissued in her name.  If there was an estate, then you might consider having it issued to the estate. These options are listed if you were not liable for the debt.

If you are liable for the debt you can take the Claim of Right on your 2023 return using the steps below.

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 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. 

Re: Overpaid by employer, the federal government

The answer is based on the assumption that the payment is received in 2021, and some of the repayment of the overpayment did occur in a later tax year (2022). A W-2C isn't an action that would normally occur in your situation.

1. 2021: The W-2 should be correct.  The payment and part of the repayment occurred in the same tax year.  The W-2 should have been reduced by the amount of the repayment they withheld from you in the same tax year.
2. 2022: The repayment of $3,499 was repaid in a later tax year and should have been included in your gross wage on the W-2 for 2022. 
   • This is known as a 'Claim of Right' and can be used to reduce your taxable income as a deduction or a credit to reduce your overall tax liability on your 2022 tax return because it is over $3,000.

Credit: If you choose to use the credit instead of the income reduction, then you would have to calculate that manually.

• The tax return would have to be completed in the TurboTax CD/Download version if the credit is used.  For assistance with this, see: 
  • How to switch from online TurboTax to the TurboTax software? and TurboTax Prior Year Products.​​​​​​​

1. ​​​​​​​Figure your tax for 2021 without deducting the repaid amount you received in 2022.
2. Refigure your tax from the earlier year (the year you originally reported the income) without including in income the amount you repaid in 2022.
3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
4. Subtract the answer in (3) from the tax for 2022 figured without the deduction (step 1)
5. Income Reduction Method (most common): If you choose to use the income reduction method you can use the TurboTax Online or TurboTax Desktop.​​​​​​​

Follow the steps below for the method you have selected.

Taking the Income Reduction in TurboTax

1. Login to your TurboTax account or open your tax return.
2. Click on Federal Taxes and then 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

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.