Overpaid by employer, the federal government

[5nipper]

In 2021 I was given a retention incentive of $10,000 for taking a job in Germany. Except they made  a mistake and gave me $20K.

I reported it immediately and they took it out of my pay over the next several months into 2022.

Stupidly I did not realize that I had paid taxes on this.

My question is, should I ask for a W-2C and refile my taxes?

[Anonymous_]

Paging @pk for this.

[pk]

@5nipper , so you a US person ( citizen / Green Card )  are saying that  your employer in the USA issued you a W-2 last tax year, showing excess payment and has since corrected the error by reducing  monthly payments  ?  Therefore you are asking for a W-2C because your employer in US gov but the work was done in Germany -- yes ?

Or are you saying that all you are trying get back is the excess taxes  you may have paid  on the extra 10 K of income or a portion thereof?

I cannot  judge the case  because surely since they paid  and then started reducing your  monthly pay packet from the time they were informed, it probably has averaged out as for the taxes  ( Fed, FICA etc. ) and W-2 should have been correct.   Can you give some dates  --- for 2021, when did you receive the  bonus, when did they start collecting back and what rate; did the total received for 2021 ( including reduced monthlies ) match the W-2 ?

Please help -- I will circle back once I hear from you .  But in general , yes  you should get a corrected W-2

[5nipper]

Thanks for your response.

Yes I am a GS civilian still working in Germany for the army.

It is very difficult to answer the questions you asked because my salary changed when I moved to Germany in August 2021 and I don't have all the pay-stubs. They also did not take out the same amount every month for repayment. They started recouping the over-payment in OCT 2021.

I was able to determine(I think) that I paid back $4663 in 2021 and $3499 in 2022, which makes a total of $8162.

So it looks like I did not have to pay all taxes on the $10,000. Maybe only Social Security and Medicare.

Recently I received notification from DFAS ( Defense Financing and Accounting Service) stating that I was overpaid by $3499 in 2022 and it was reported as taxable income.

Thanks again for your help.

[DianeW777 · Accepted solution]

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 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.

See image below for assistance.

@snipper

[5nipper]

Thank you very much, this answers my question fully. Thank you for putting my mind at ease. Doing taxes make my blood pressure rise.