I was paid sign on bonus in 2017 which I had to repay back in 2018. Does turbotax Deluxe guide it as a credit under IRS publication 525 page 34 under repayment?

[ajmalgodil]

I know turbo tax handles itemized deduction but I would like the software to guide it as a credit if the amount is more than $3000 which is on page 33 of IRS Publication 525 Taxable and Nontaxable Income under Repayment. It would be ideal if the SW checks both methods and recommends the most optimum one. 

[Opus 17]

 No. You have to do that manually, because it requires a calculation off of your past years tax return. 

If you want to use the claim of right credit, you have to use TurboTax installed on your own computer from a CD or download. Switch to forms mode and enter the credit directly on line 74, I think, which is on schedule 5 this year.  Write “IRC 1341“ next to the dollar amount.  

 Or, you can use TurboTax online by upgrading to the Live version, and having your CPA contact edit the form for you. You can’t directly edit your own forms in the online version. 

 Also beware, you can’t use the claim of right procedure unless you had a reasonable belief that you had an unrestricted right to the money at the time you received it.  If the signing bonus was contingent on you staying with the company a certain length of time, and you knew this, then an argument can be made that you knew that you did not have an unrestricted right to the money.    A counter-argument would be that you expected to stay with the company, so you had a reasonable expectation of an unrestricted right to the money, and you changed jobs because of some unforeseeable event or hardship.   I can’t tell you what an auditor would say if you are audited, but you should be aware of the issue, and you should make an effort to document in your own records why you believe you had an unrestricted right to the money. 

 If you did not have an unrestricted right to the money, you can only use the itemized deduction method. 

[Opus 17]

 Also, using the itemized deduction method, the repayment will usually flow to your state tax return as an itemized deduction. If you use the claim of right procedure on the federal return, it will not affect your state return and you have to check your state rules to see if they also have a claim Of right procedure.  

[ajmalgodil]

For credit method do I reduce wages(box1 on my W2 for that company) by repayment amount and calculate the delta with and without this amount for the prior year tax year in turbotax and enter this amount onto line 74 on schedule 5 for this year taxes and write IRC1341 next to this amount?  Also, how do I confirm if Az state allows right of procedure and if they do how do I account for it in Turbo Tax for Az state taxes?

[Opus 17]

For the federal, you would need to be using Turbotax for 2017, which at this point can only be installed on your own computer as a download or from a CD (not online).  Assuming you have your final tax return and tax data file from 2017, you would determine the amount of the credit by adjusting box 1 of the W-2, and then noting the difference in your income tax on form 1040 line 55, before and after the adjustment.  That is the amount of credit you can take on line 74 for 2018.

You don't want to use Turbotax 2018 to calculate the amount of the credit because the tax rates changed.

There are also instructions to calculate the credit in publication 525, although they may refer you to manual calculations using the 2017 forms and instructions. <a rel="nofollow" target="_blank" href="https://www.irs.gov/forms-pubs/about-publication-525">https://www.irs.gov/forms-pubs/about-publicati...>


Arizona does have a Claim of Right form and instructions if you search their web site, the limit is the same as the IRS, $3000 or more.

<a rel="nofollow" target="_blank" href="https://azdor.gov/forms/individual/individual-form">https://azdor.gov/forms/individual/individual-fo...>

I don't know where it will be in Turbotax, but the state modules usually have one or more screens of state-specific additions to income and state-specific deductions and credits.  If you can't find it, you can try searching, or call Turbotax customer support and ask for an Arizona specialist.

[ajmalgodil]

For claim of rights for state of Az, I re-ran last years Az state taxes with and without the repayment amount and entered this difference on the non-resident 140NR form for this year on line 64b, is this correct? I don't think step by step on turbo tax is not handling this correctly since it asks for claims of right amount you entered on Federal forms and wants to add that amount to the Az income which is NOT correct.

[Opus 17]

I think I'm going to have to send you to a tax professional or ask you to call customer support and ask for an Arizona specialist.  I don't have the ability to view the Arizona tax program.  If you are using the itemized deduction method, the amounts would be the same on both returns.  If you are using the direct credit method, then presumably you have figured it correctly, although the Arizona return might be asking for both figures to see which is better for you.  Also, if Arizona is one of the states that allows you to deduct your federal taxes on your state return (not all do), then making a federal adjustment would also cause an adjustment to be made to that deduction, which might be a reason the Arizona form is asking for the federal credit.  I don't know, and I can't look it up for you since I can't get the Arizona module without paying for it.

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