Sign-On Bonus Repayment

[fudixa]

I received a sign-on bonus of $10k in 2022. l left the employment in Mar 2023, and have repaid a prorated amount of $7900 using after-tax money.

The employer issued me a 2022 W-2C, which showed corrections in boxes 3-6. The amount difference of Social Security and Medicare after corrections (together approximately $600) was subtracted from the balance I owed to the company.

My questions are:

1. Is it correct that I don't need to deal with SS and Medicare parts since the company has issued a W-2C and the amount I overpaid (i.e., $600) has been refunded to me (because I did not repay this amount)?

2. What's the right time of year to claim the overpaid federal and state taxes? The bonus repayment was completed in Mar 2023. I haven't filed my 2022 tax returns yet. Can I claim the overpaid federal and state taxes now, or should I wait till 2024 when filing 2023 tax returns?

3. When deducting the repaid amount in "Deduction and Credits--Other Deductible Expenses" on Turbotax software, should I put the repaid amount of $7900 (the company stated in a letter) OR $7300 (the actual amount I paid, subtracting the $600 refund I received from SS and Medicare)?

Thank you very much for the help.

[Vanessa A]

1. Is it correct that I don't need to deal with SS and Medicare parts since the company has issued a W-2C and the amount I overpaid (i.e., $600) has been refunded to me (because I did not repay this amount)? Correct.  Your employer is the one that will issue a refund for SS and Medicare overpayments.  Since your employer has already taken care of it, there is nothing you need to do. 

2. What's the right time of year to claim the overpaid federal and state taxes?  The bonus repayment was completed in Mar 2023. I haven't filed my 2022 tax returns yet. Can I claim the overpaid federal and state taxes now, or should I wait till 2024 when filing 2023 tax returns? When you deduct the $7,900 from your income, this will lower your taxable income and result in a refund of the excess taxes withheld. 

3. When deducting the repaid amount in "Deduction and Credits--Other Deductible Expenses" on Turbotax software, should I put the repaid amount of $7900 (the company stated in a letter) OR $7300 (the actual amount I paid, subtracting the $600 refund I received from SS and Medicare)? You will enter the $7,900.  It is similar to your W2, your box 3 and 5, the wages are not reduced by the amount in box 4 and 6 from your federal amount. 

[Mike9241]

in 2023 you have two options. 1) take it as a deduction on line 16 of schedule A which means you have to itemize to get any benefit. you would indicate it as a "Section 1341 repayment".  2) the other option is you recompute your taxes for 2022 without that $10K (reduce box 1 of W-2 by $10k) the decrease in tax is taken as a credit on your 2023 return. this is usually much better than the deduction method the credit is reported on line 13d of schedule 3. how you get there is a mystery because i went through step by step and never encountered a question about taking a credit for income repayments section 1341  - claim of right.

repayments

[fudixa]

Thank you very much for the response. 

About my 2nd question: Should I deduct the $7900 for the tax year 2022 or 2023?

Your answer to my 3rd question: "You will enter the $7,900.  It is similar to your W2, your box 3 and 5, the wages are not reduced by the amount in box 4 and 6 from your federal amount. "
Did you mean that deducting $7900 will only lower the federal wages (Box 1 on W-2)? It is the numbers on W-2C that will update the SS and Medicare wages and their withholdings? 

[fudixa]

@Vanessa A 

Thank you very much for the response. 

About my 2nd question: Should I deduct the $7900 for the tax year 2022 or 2023?

Your answer to my 3rd question: "You will enter the $7,900.  It is similar to your W2, your box 3 and 5, the wages are not reduced by the amount in box 4 and 6 from your federal amount. "
Did you mean that deducting $7900 will only lower the federal wages (Box 1 on W-2)? It is the numbers on W-2C that will update the SS and Medicare wages and their withholdings? 

[AmyC]

About your 2nd question: The $7900 is not deducted on 2022 or 2021. Instead, you will use that amount to create the IRC 1341 for this year's return by recalculating the tax on your 2021 return as if you had not earned that income. See Turbo Tax article What is a Claim of Right Repayment.

About your 3rd question: 

1. No, you want to claim the credit which is a dollar for dollar reduction of your tax liability. You are not reducing wage income.

2. Yes, you will enter the corrected w2 exactly as it is. As for updating records, your employer has already handled that when the form was created. The w2C is a confirmation of the adjustments made for SS and Medicare.

It sounds like you got the money one year and paid it back the next. If for some reason the money paid back was held longer, please see my answer here for help.

Edit: Opus 17 is right, my timeline is off. The whole point of the IRC 1341 is to claim credit for taxes paid on income in a prior year. Which is why the income has to be claimed before you can have a credit - a very few people do take the deduction instead.    [4/7/2023|8:11 AM]

@fudixa 

[Opus 17]

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@fudixa wrote:

Thank you very much for the response. 

About my 2nd question: Should I deduct the $7900 for the tax year 2022 or 2023?

---

Because the repayment occurred in 2023, you will report the repayment on your 2023 tax return.  You can either claim the gross repayment as a special itemized deduction, or claim an "IRC 1341 Claim of Right" credit.  If you already itemize your deductions and your income is similar year to year, the two methods will be similar, but you would have to test which method you want to use.  If you want to use the IRC1341 method, you will have to determine the credit amount yourself, and you will need to manually enter the credit on your tax return, which means you will have to use Turbotax installed on your own computer instead of the online version.  But that's something to deal with next year. 

Your answer to my 3rd question: "You will enter the $7,900.  It is similar to your W2, your box 3 and 5, the wages are not reduced by the amount in box 4 and 6 from your federal amount. "
Did you mean that deducting $7900 will only lower the federal wages (Box 1 on W-2)? It is the numbers on W-2C that will update the SS and Medicare wages and their withholdings? 

I don't understand what you are aiming at.  Because you were forced to repay 2022 wages, you were over-taxed in 2022, that included federal income tax, state income tax, and social security and medicare tax. Your company took care of refunding the SS and medicare tax overpayment.  The way you get credit for the federal income tax overpayment is to either claim a deduction on your 2023 return (which reduces your taxable income in 2023 and therefore reduces your tax) or you claim an IRC1341 credit on your 2023 return.  The way you get compensated for the state income tax is to either take the special itemized deduction which will reduce your 2023 taxable income, or to claim a Claim of Right tax credit on your state return. (You will have to look up how to do this, different states may have different procedures.)

[Opus 17]

@AmyC 

@fudixa 

2022, not 2021.

Let me explain a bit more.  On your 2023 return, you will either,

1. claim a special itemized deduction for $7900, which will reduce your 2023 taxable income and therefore reduce your tax.  Or,
2. claim an IRC1341 tax credit.  The way you calculate the credit is to re-calculate your 2022 return as if you never received the $7900 of wages, and figure out how much less your tax would have been.  That difference is the credit you can claim on your 2023 return using the IRC1341 procedure.

But even though you will need to perform a recalculation of your 2022 taxes to determine what the credit should be, you still file the 2022 return based on the wages you actually received in 2022 (even though you repaid them in 2023).  And recalculating your 2022 tax does not mean you file an amended 2022 return.  It is simply the method used to calculate the credit you can claim on your 2023 return.

The deduction method is much easier, but may result in less tax benefit depending on your overall situation.  You may use whichever method gives you the largest recovery.

But bottom line for 2022 is, you ignore the repayment since it happened in 2023, and you report your 2022 wages as received, and pay tax accordingly.  The credit or deduction for the repayment will be on your 2023 return next year.