Repayment of signing bonus in subsequent year

[facts]

hi.

if repayment of bonus amount is very large and is in excess of current years income is it possible to :

 treat as "refundable credit" and get a refund or carry forward unused portion of credit

 thanks

[Mike9241]

is the repayment more than $3,000? this is important

[facts]

payment is very large- 6 figures

[AmyC]

Yes, you can get a refund. Since you repaid more than $3,000, you can use the method where you claim a credit, IRC 1341. It can be complicated depending on how many years were affected. These are the steps:

1. Figure your 2020 tax as normal, without deducting the repaid amount.
2. Locate prior year taxes that are now incorrect. Note the amount of tax liability.
3. Refigure your tax from the earlier year(s) subtracting the income that you have repaid.
4. Subtract the difference in tax liability for each year.
5. Add all the differences together for your 2020 credit allowed. This could give you a refund.
6. Please see example and full details in my other post.

@facts

[facts]

thanks amy.

so just to confirm, it's treated like a refundable credit. if the credit comes to say $200,000 and current years tax liability is say $10000, i can get refund of $190000?  the credit is not limited to current years tax liability. thanks in advance for your help!

[Opus 17]

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@facts wrote:

thanks amy.

so just to confirm, it's treated like a refundable credit. if the credit comes to say $200,000 and current years tax liability is say $10000, i can get refund of $190000?  the credit is not limited to current years tax liability. thanks in advance for your help!

---

Yes, it is a refundable credit.  The credit is entered on line 12d of schedule 3, which is the refundable credits.  To enter the credit, you must be using turbotax installed on your own computer (Mac or PC) from a CD or download.  Switch to forms mode, open schedule 3, enter the amount on line 12d, and write "IRC 1341" on the line next to the amount.

You must calculate the amount of the credit yourself.  A large claim of right credit will almost certainly be audited, so save all your documents showing the requirement for a repayment and how you calculated the credit. 

[Jbthomp07]

Sorry to revive an old thread, but I'm encountering this situation with a bonus received in 2020 and repaid in 2021. 

I received a $5,000 bonus that ended up being just shy of $3,600 after taxes. When repayment was requested from my former employer, they explained that the full $5,000 needed to be repaid and the included explanation was "Per the IRS, the employee owes the entire gross, and we will only adjust his Social Security and Medicare wages/taxes. Once the repayment has been received, we will process a corrected 2020 W2." So luckily I was still holding the bonus in my savings account, but I still came out of pocket $1,400 to repay them.
(Not being a tax pro, I didn't understand the distinction of "we will only adjust SS and Medicare wages")

I ended up in this thread because I've now repaid the full bonus, received my W-2c and entered it, but I'm not seeing my 2020 refund change at all. I was expecting it to increase some. From what it sounds like here, if my former employer won't directly refund me the excess SS/Medicare taxes then I'll be eating that overpayment of  $382.50 off the $5,000 bonus? The only real action left to take is to wait a year and file a Claim of Right claim on my 2021 taxes in the hope of recouping the remaining $1,000-ish that I'm still out-of-pocket? Hoping someone (@Opus 17?)  can confirm if my understanding is correct or not.

[Opus 17]

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@Jbthomp07 wrote:

Sorry to revive an old thread, but I'm encountering this situation with a bonus received in 2020 and repaid in 2021. 

I received a $5,000 bonus that ended up being just shy of $3,600 after taxes. When repayment was requested from my former employer, they explained that the full $5,000 needed to be repaid and the included explanation was "Per the IRS, the employee owes the entire gross, and we will only adjust his Social Security and Medicare wages/taxes. Once the repayment has been received, we will process a corrected 2020 W2." So luckily I was still holding the bonus in my savings account, but I still came out of pocket $1,400 to repay them.
(Not being a tax pro, I didn't understand the distinction of "we will only adjust SS and Medicare wages")

I ended up in this thread because I've now repaid the full bonus, received my W-2c and entered it, but I'm not seeing my 2020 refund change at all. I was expecting it to increase some. From what it sounds like here, if my former employer won't directly refund me the excess SS/Medicare taxes then I'll be eating that overpayment of  $382.50 off the $5,000 bonus? The only real action left to take is to wait a year and file a Claim of Right claim on my 2021 taxes in the hope of recouping the remaining $1,000-ish that I'm still out-of-pocket? Hoping someone (@Opus 17?)  can confirm if my understanding is correct or not.

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The company can't adjust your box 2 and box 17 state and federal income tax withholding--whatever was withheld was withheld, and they can't adjust your box 1 taxable wages because whatever was paid in 2020 was received by you in 2020 and is taxable in 2020.  You will get your federal and state taxes on the $5000 back by filing the claim of right on your 2021 return.

The social security and medicare is a little different.  If they issued a W-2c that reduces your box 3 and box 5 wages, and reduces your box 4 and box 6 social security and medicare tax withholding, they should also be sending you a check for the difference.  They can't actually withhold (for example) $5000, and report withholding $4690, unless they pay you back the extra $310.

If they reduced your box 3 and 5 wages by the amount of the $5000 repayment, then boxes 4 and 6 should be reduced by $310 and $72.50, and so they owe you a check for $382.50.

If they refuse to issue a check for the $382.50, you need to get that in writing.  You can then file a form 843 with the IRS, which is a request for refund of excess social security and medicare tax.  You would explain the situation about the repaid bonus, you would explain that they recalculated the amount of SS and medicare you should have paid, but that they refused to refund it.  Include copies of the original W-2, the corrected W-2, their refusal in writing to pay the $382 refund, and any other documents related to the repayment of the bonus.  Turbotax does not include form 843 and this is not part of your regular tax return, you file it separately whenever you are ready. 

[Jbthomp07]

"If they reduced your box 3 and 5 wages by the amount of the $5000 repayment, then boxes 4 and 6 should be reduced by $310 and $72.50, and so they owe you a check for $382.50."

You're spot-on about the adjustments on boxes 4 and 6. I'll reach back out to them about a refund for the SS/Medicare overpayment.
Regarding form 843, that would be attached to 2020 taxes since that's what the W-2c was amending? I know the Claim of Right process is next year, so I just want to confirm I understand correctly.

[Opus 17]

The 843 would be filed separately, it's not part of your regular tax return.  There's no specific deadline, although you should probably file as soon as you get written confirmation from your employer that they will not refund the SS and Medicare tax they adjusted.

https://www.irs.gov/forms-pubs/about-form-843

You'll need to file the 843 by mail since it's a separate claim and not available for e-file, you can still e-file your regular tax return as usual.  

[atlwal339]

Hi there! Do you know what the latest is on how to claim the repayment amount as a deduction or credit? I had a portion I repaid in 2019 and the final portion in 2020. Already claimed the 2019 portion in my 2019 taxes. Thanks! both portions are for more than $3,000.

@Opus 17 

[AmyC]

Since you repaid more than $3,000, you can use the method where you claim a credit. It can be complicated depending on how many years were affected. These are the steps:

1. Figure your 2020 tax as normal, without deducting the repaid amount.
2. Locate prior year taxes that are now incorrect. Note the amount of tax liability.
3. Refigure your tax from the earlier year(s) subtracting the income that you have repaid.
4. Subtract the difference in tax liability for each year.
5. Add all the differences together for your 2020 credit allowed.
6. Please see example and full details in my other post.

@atlwal339

[agrawal_aashish]

Hi @Opus 17 & @AmyC 

I'm looking to file my 2020 taxes now, and wanted to confirm something. Is it true that I can only use the IRS 1341 Claim of Right Credit if I'm doing itemized deductions vs. Married Joint Filing (which is what I usually do)?

To remind you, I repaid $7.5k of sign-on bonus (paid to me in 2019) in 2020 when I quit through an adjustment against my 2020 performance bonus. My understanding was that I could claim the federal & state tax of the $7.5k in my 2020 returns but it looks like it can only be done through itemized deductions which in my case is less than Married Filing Jointly.

Please advise - very grateful for your help!

thanks!

[AmyC]

@agrawal_aashish No, you can claim a credit on sch 3, line 12. 

Since you repaid more than $3,000, you can use the method where you claim a credit. It can be complicated depending on how many years were affected. These are the steps:

1. Figure your 2020 tax as normal, without deducting the repaid amount.
2. Locate prior year taxes that are now incorrect. Note the amount of tax liability.
3. Refigure your tax from the earlier year(s) subtracting the income that you have repaid.
4. Subtract the difference in tax liability for each year.
5. Add all the differences together for your 2020 credit allowed.
6. Please see example and full details in my other post.

For more information, see About Publication 525, Taxable and Nontaxable Income page 36, method 2. 

In addition, you may need to file Form 843 for Medicare and Social Security taxes. See page 36, 3rd column.

The online version can't handle this, you will need to use the download version. 

Applying the credit:

1. Return to the current tax year. (The credit can only be applied using the Forms mode in the TurboTax CD/Download product.)
2. Select the Forms icon.
3. Choose 1040/1040RSR Wks from the list on the left and the worksheet will appear.
4. Scroll down to the Other Credits and Payments Smart Worksheet.
5. Enter the adjusted amount of tax paid.
6. Enter the credit amount you calculated on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
7. Select 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.

[akumarz3]

Hello @Opus 17,

Thank you so much for wealth of information. I just wanted to confirm what I learnt here.

My daughter had to pay bonus back (about 8000$) that she received in 2019 but then paid in 2020 through her last paycheck and also a personal check that she wrote to them.

Company issued her W2C for 2019 but had only changes on line 3-6. Box-1 was not changed.

What I have gathered is for 2020 taxes (she has not filed yet) - she can file schedule 3 - line 13 by checking D option and reporting her credit by redoing her credit for 2019 with what was paid and what she would have paid if bonus was not included.

Much appreciate your confirming - this is really beyond my league and trying to help her get some money back.

Thanks,

AK