Paying back relocation

[ackern32]

Hello,

I started a new job in 2020 while working from was still required. My new employer included a relocation package in my onboarding. However, now that work from home will be a permanent option they are requiring all relocation packages offered during that time be repaid. The original package was taxed and I am responsible for paying back the full tax burden of that payment. Will I be able to claim this repayment as a credit on my 2021 taxes to get that money back? What is the best way to recoup those losses?

Thank you!

[OpeA1]

It will be best to check with your HR department about this issue as the relocation package must have been added to your W-2. Since you are still with the company, they will be best to tell you how they plan to handle the repayment.

[ackern32]

Thanks for replying. The only answer they have given me on the multiple times I have asked for guidance is, "Talk to a tax expert." They aren't being helpful at all.

[KochuK]

Hi ackern32, thank you for joining the special forum today.

The relocation benefit was included in your taxable income in 2020 and you paid income tax on the amount, and now you need to pay back the relocation benefit in 2021 to your employer.

The answer to your question depends on the amount of payback. If the amount is $3,000 or less, there is not much you can do.

Quote

Repayments of Income Generally, repayments of amounts that you included in income in an earlier year is a miscellaneous itemized deduction and can no longer be deducted.

Repayments Under Claim of Right If you had to repay more than $3,000 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 deduct the amount you repaid, or take a credit against your tax.

Unquote

Pages 5 and 11 of IRS Pub 529 https://www.irs.gov/pub/irs-pdf/p529.pdf

For repayment over $3,000, there are two methods: take a deduction against taxable income, or calculate a credit against the tax liability for tax year 2021. The steps require some work, which is detailed in page 36 IRS Pub 525 under “Repayments”.

https://www.irs.gov/pub/irs-pdf/p525.pdf

Hope the above helps.

[SundayInSalem]

If your relocation package is more than $3,000 you have the option of claiming the repayment as a deduction or tax credit.

How the credit works

Claiming the tax credit is more complicated but usually saves more money. To compute the credit you will have to subtract your relocation bonus amount from your 2020 return and get the new tax liability. If you used TurboTax , you can use amend your return and change the number (you're not actually amending so change the numbers back after you're done). The difference between the old and new tax liability is the credit amount applied to your 2021 return. 

For example if your tax liability was $5,000 including relocation and $4,000 without, your tax credit is $1,000. You will need TurboTax CD/Download to enter this credit on your tax return.

Using TurboTax

TurboTax Alumni Expert @KathrynG3  shows you how in paying back sign on bonus. Follow the steps in Option 2.

She writes: 

To enter a credit, you will need to convert to TurboTax CD/Download. Go to Forms Mode. Scroll down to 1040/1040SR Wks. Enter the amount of tax. . . on Schedule 3, Line 12d under Other. See the screen shot.

TurboTax explains: 

Schedule 3, Line 12 - Other Credits and Payments Smart Worksheet:

Line D - if you have a repayment treated as a credit, enter the amount allowable here. The program includes the amount on line 13, checks box 13d, and prints the text "I.R.C. 1341" to the right of box 74d. See Pub 525.