Last year, I started a new job that had a sign-on bonus requiring 2 years at the company. A couple months ago, I left that job just before a year of being there to take a fellowship position. Upon leaving my previous job, I had to pay back the proportionate amount of that sign-on bonus, including the amount that had already been withheld for taxes by the company.
I have seen a few questions on here regarding how to get back the taxes on the repayment and have an idea of how to do that (deduction since the amount is under $3000). However, with my fellowship position, I have to do estimated taxes.
My question is, is there a way for me to utilize that deduction for my estimated quarterly taxes? Meaning, since ~$3000 is owed back to me, do I need to make quarterly tax payments?
I was planning on just making quarterly payments and waiting until my tax refund for everything to even out, but if there is a way to handle it now that would be great.
Please let me know your thoughts, and if you need any clarification!
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From what you wrote it's not clear whether the amount you have to pay back is less than $3,000, or the tax on the repaid amount is less than $3,000. The tax treatment depends on the amount that you have to repay, not the amount of tax involved. Please clarify exactly how much you have to repay. An approximate amount ("~$3000") is not good enough because $3,000 is the dividing line.
The tax reform law eliminated the deduction for a repayment of $3,000 or less for 2018 through 2025. So if you are repaying $3,000 or less in 2018, you get no deduction and the repayment will not make any difference in your 2018 taxes. It's the year of the repayment that matters, not the year that you received the bonus.
If you are repaying more than $3,000, you can claim an itemized deduction for the amount that you repaid. However, this will not make any difference in your tax unless your total itemized deductions are more than your standard deduction. The new tax law also increased the standard deduction. For a single person under 65 the standard deduction is $12,000 for 2018.
You are going to hear about another method of handling the repayment, by claiming a tax credit under IRC Section 1341 instead of an itemized deduction. But the IRC 1341 tax credit can only be used if, in the year you received the bonus, you reported it as income "under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it" (quotation from IRS Publication 525, page 34). But you do not have a claim of right because it did not appear that you had an unrestricted right to the income. You knew at the time you reported it that you would have to repay part of it if you left the company before two years. That's a significant restriction on your right to the income. Therefore you cannot claim the IRC 1341 tax credit.
Note that none of these options has anything to do with the amount of tax that was withheld from the bonus.
If you know that you will be able to claim the itemized deduction for the repayment, you can reduce your estimated tax payments by the amount that the deduction will save on your taxes. If you will not be able to claim the itemized deduction, either because the repayment is $3,000 or less or because you do not have enough other itemized deductions to exceed your standard deduction, then the repayment is not going to reduce your tax, so you should not make any adjustment in your estimated tax payments.
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