Tax Issue for Repayment of Signing Bonus in the next year

[wilsoneee]

Hi there:

I joined a startup company in 2021 and got a signing bonus of $30K at that time, and there's a condition that I have to stay there for at least 2 years, and I need to pay back the full amount otherwise. I left the company a couple of weeks ago and paid back the full $30K (in 2022), and then they sent me the corrected W-2C form. A note is that, as for that bonus, what I got in 2021 was ($30K - all the taxes) = around $20K, while I paid back the full $30K in 2022. My total taxable wage for 2021 (excluding that $30K bonus) is around $180K.

My issue is with the W-2C, where only Boxes 3, 4, 5, 6 changed, while I thought Box 1 (Wages, tips, other comp.) should decrease by $30K. I talked to the company, who told me that "they were not allowed to adjust Box 1 or 2". 

I'm totally confused - I thought Box 1 should be the total amount of the Taxable Wages I earned in 2021, so since I paid back the full amount of the bonus, I did not earn that amount in 2021, then should it drop by $30K? Why can the company not adjust Box 1 (which was not correct)?

My questions are two-folds:

1). Is the company correct in saying that they're NOT allowed to adjust Box 1? If they're wrong but still refuse to adjust it, what can I do about this?

2). If the company is correct, then apparently I'm paying more taxes for 2021 than I should be. How can I use turbotax to get it back (by amending 2021 return, or doing something in the 2022 tax return)? 

Much appreciated!

Wilson

[bosso3]

What year did you repay the money?  2021 or 2022.

[wilsoneee]

Thanks!

I paid back in 2022 while I got the bonus in 2021. In 2021, I got ($30K - taxes) = around $20K in my bank account, while I paid back $30K with a check.

[JamesG1]

You received a 2021 W-2 for $30,000.  You paid back the $30,000 in March or April of 2022.  You receive a "corrected" 2021 W-2.

I am surprised that they provided the "corrected" W-2 since the repayment was in 2022.  I would not have thought they would have issued any "corrected" 2021 W-2.  But I only prepare payroll, I am not a payroll specialist.

We may end up revisiting this issue a year from now.  If you received taxable income in 2021 and paid all of it in 2022, you qualify for a claim of right repayment on your 2022 Federal tax return.

A claim of right repayment occurs when a taxpayer is required to repay income that they had reported and paid tax on in a previous tax year. The repayment must be of funds that, when received, the taxpayer had a reasonable belief he or she had unrestricted access to.

If you have an amount of $3,000 or less, follow these steps.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Did you have any of these less common expenses? select Repayments of $3,000 or less.

If you have an amount of $3,000 or more, follow these steps to report a deduction on line 16 of Schedule A Itemized Deductions.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Tell us about your other expenses, select Claim of right repayment over $3,000.

Payment of an amount of $3,000 or more may also be made by a credit on the 2022 Federal 1040 tax return.  Computation of the credit option is outlined here by KristinaK.

[wilsoneee]

Thanks a lot, @JamesG1 ! I updated my original post to make it more clear.

I have 2 follow up questions:

1) In the method you described above (Claim of right repayment over $3,000), would you mean 2021 tax return (which is due today, or 2022 tax return (which will happen next year)?

2) I have already filed my 2021 return last week. If the answer to 1) is 2021 tax return, shall I just amend it?

Much appreciated!

Wilson

[AliciaP1]

No, the repayment happened in 2022 and you reported the taxable income in 2021.  As our Expert @JamesG1 stated, "A claim of right repayment occurs when a taxpayer is required to repay income that they had reported and paid tax on in a previous tax year."

@wilsoneee

[wilsoneee]

Thank you @AliciaP1 ! sorry I'm not sure - so I should amend my 2021 tax return? Thanks.

[wilsoneee]

ping

[bosso3]

I'm not expert in this, but perhaps this helps.

@wilsoneeeasked in their most recent post "I should amend my 2021 tax return?"

I believe the answer is No.  But you should save a copy of the corrected 2021 W-2, for use in your 2022 return.

I think the reason the 2021 W-2 was "corrected" was to correct the 2021 Social Security and Medicare tax withheld - so that your Social Security payments history is correct.

Now, you are probably wondering did you pay too much tax in 2021? 

The answer is NO - based upon 2021 data.  The answer is yes - based upon 2022 data. 

In 2021 you paid exactly what you should pay based upon the 2021 data.  This is as it should be.

But, based upon 2022 data you paid too much in 2021, and you will recoup that in your 2022 tax return because your repayment occurred in 2022.

As @JamesG1 said in his post " If you received taxable income in 2021 and paid all of it in 2022, you qualify for a claim of right repayment on your 2022 Federal tax return."

Keep these notes so you will know what to do when you file your 2022 taxes in 2023.

**Say "Thanks" by clicking the thumb icon in a post

@AliciaP1 

[wilsoneee]

That's clear, Thank you!