Assuming the overpayment is considered non-fraud, that is you are simply paying back the amount you over-collected and no more, then you will claim the amount you pay back in 2015 using the "claim of rights" doctrine which which allows you to receive a tax credit, (or a deduction in determining taxable income), for that amount according to the Internal Revenue Code.
If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040). If you paid more than $3,000 you might think this doesn't apply to you, but read on.
If during the year you repaid more than $3,000 you can also deduct this on Schedule A but, alternatively, you can take a tax credit for the year of repayment, whichever provides the most benefit. In order to claim a credit you'd need to be able to re-figure your 2010 taxes without the repaid amount included.
So, you have two methods of handling the repayment in your taxes
Method 1 - Itemized Deduction
Figure the tax for the current tax year, claiming a deduction for the repaid amount. Repaid wages must be deducted as a miscellaneous itemized deduction.
Method 2 - Credit for prior year taxes paid
Figure the tax for the current year claiming a credit for the repaid amount following these steps.
1. Figure the tax for the current year without deducting the repaid amount.
2. Refigure the tax from 2010 year without including in income the amount repaid during the current year.
3. Subtract the tax in (2) from the tax shown on the return for the earlier year. This is the credit.
4. Subtract the answer in (3) from the tax for the current year figured without the deduction (step 2).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 70, and enter “I.R.C. 1341” in the column to the right of line 70.
The IRS discussion about claim of rights is here: https://www.irs.gov/publications/p17/ch12.html#en_US_2015_publink1000172015
If you intend to claim the credit I believe you will have to use the "desktop" version of TurboTax, switch to "Forms mode" and manually input the amount on the face of the Form 1040 in the "Other Credits and Payments Smart Worksheet" that's between lines 72 and 73 on the Form.
OR
If you take the deduction go to the "Deductions & Credits" section of TurboTax and scroll way down the page to the "Other deductible expenses" interview. That's where the claim of rights deduction is entered.
Tom Young
