Repayment of signing bonus in subsequent year

[stizwv]

I could use help on same/similar issue. I received bonus for 30K in December of 2018.  In 2019 I left employment with this company and paid back pro-rated portion of bonus plus the Employee Medicare listed on pay stub (435.00). I paid back 29/36th of the money (24166.67-435.00=23731.67). I did not subtract out anything else. They have now sent me a letter saying they want to refund social security tax (1498.34 and Medicare Tax 350.41).   They letter also states "We ask that you sign this letter stating that you will not seek reimbursement for Social Security and Medicare tax that was withheld from your payment in the future nor have you made any previous claims. "   

Social security withheld on pay stub was 1860.00. So I'm confused with regard to the math AND I want to make sure this is best way to proceed. 

I'm assuming I can recover some of the taxes I paid on the ~24K when I file this year. 

Any advice , insight would be appreciated. 

Also in 2018 I maxed out the social security tax, so now getting this back would UN-MAX me out -- would I then have to file addendum for 2018? 

Thanks! 

[BDAAK]

Hi - do you know where on the 2019 Form 1040 to note IRC Section 1341 credit?

On the IRS website (https://www.irs.gov/irm/part21/irm_21-006-006r#idm14002690687376) under the 21.6.6.4.12.3 (02-03-2011) Claim of Right - IRC Section 1341, Repayment of More Than $3,000 section, it states:

(5) If the tax under Method 2 is less, the credit figured under that method should be entered on Form 1040, U.S. Individual Income Tax Return, line 73 with the annotation "IRC Section 1341" in the column to the right of line 73.

But, the 2019 Form 1040 doesn't have a line 73!

Am I missing something?

Thanks for any help you can provide!

[MaryK4]

It seems that the IRS needs to update!  It now will go to Schedule 3 (Form 1040 or 1040-SR), line 13.

You only enter the credit in TurboTax Desktop program by going to the Forms mode - 1040/1040SR Wks-

Schedule 3 Part II Other Credits and Payments Smart Worksheet Line D

@BDAAK

[Edited 2/16/20 | 3:11PST]

[jersey355]

@Opus 17 - I'm in the same exact situation as the first person on the thread.  I accepted a sign-on bonus in 2018 (well over $3K), but then left the company and repaid the full bonus back in 2019.  I received a W2C for 2018, but box 1 did not change.  Only the social security and medicare wages were updated.

I spoke to "experts" at TurboTax twice, but I'm still not 100% convinced I got the right advice.  They advised me to amend my 2018 return.  Since box 1 was not updated, they told me to simply subtract the bonus amount from the original wages reported for 2018 and then enter the new amounts for the SS and medicare wages.

Does this sound correct?

Thank you in advance.

[Opus 17]

No, since the repayment was made in 2019, you must report the payment either as a special itemized deduction not subject to the 2% rule, or as an IRC 1341 credit, on your 2019 return.  The adjustment to the W-2 only corrected your social security and medicare tax (and hopefully your employer refunded the difference or applied it as a credit to the repayment).  To recover your state and federal income tax, you report the repayment on your 2019 return.

[Traveler65]

I have the same situation.  A sign on bonus paid in two installments - one in 2017 and one in 2018 - that I repaid in 2019.  I recalculated my taxes for 2017 and 2018 assuming these payments were not made.  I would like to use these amounts as a tax credit in 2019.  I'm using the desktop version of Turbotax Deluxe.  How do I enter this credit?

[DianeC958]

To receive a credit for the amount that was repaid you need to calculate it manually.

1. Figure your tax without deducting the repaid amount.
2.  Refigure your tax from the earlier year without including the income that you had to repaid.
3.  Subtract the tax calculated  in (2) from the tax shown on your return for the earlier year. This is the credit.

 This is the flow in TurboTax (This can only be done in the Forms mode of the Desktop version of TurboTax)

Go to FORMS (top right of main screen) > Form 1040 >Schedule 3 "Other Credits Smart worksheet"

Please enter the credit on line K. 
This credit should show up on Form 1040 line 13b
Link To Publication 525

Information about Repayments in on page 34

[Edited 02/17/20 5:15 PST]

@Traveler65 

[atlwal339]

Hello there - I'm in the same situation as the above user. What do you recommend I do? I bought the turbotax desktop version for 2019 taxes. I received a sign on bonus in 2018. Left the company halfway through 2019 and started repaying the amount, $15K. I'm paying in installments. In 2019, I paid $3,500. They haven't issue the W2-C yet since they've said I need to pay all of it first. Can I claim what I've already paid in my taxes?

Thanks in advance!

[atlwal339]

I read the thread below, seems like the form changed. But I would like to know if I can only claim what I paid so far in 2019 or if I can claim the whole amount I owe?

[Opus 17]

Correct, you can only claim the amount you paid so far (as of 12/31/2019), and only if it was more than $3000 repaid in 2019.  For each tax year, you claim what you paid back in that tax year. 

The credit is on the smart worksheet for Schedule 3, line 13d, as I believe.  Or you can still take the special itemized deduction. 

[Anonymous]

Hi @Opus 17 ,

Thank you for all your comments/advice on this thread. You appear extremely knowledgeable on this topic. 

I am in the same (slightly different) situation as the original poster. I am hoping you could clarify one point which has not been advised thus far. I also received the corrected W-2C form from my employer. Box 1 and 2 was left blank and I assume this may be correct, based on your responses (it was because the repayment took place in a separate year from the original payment - so they only managed to deal with the social security and medicare taxes). 

Therefore, I understand that I need to use the desktop version of Turbotax to file the return and manually edit the forms.

Here is where my situation is slightly different. I received $20k sign on bonus in July 2018. I left the employer on Jan 3 2020 and repaid 50% ($10k) of the sign on bonus on Jan 3 2020. So my question is, can I do as you explain above to claim the tax credit using the 1341 credit on my 2019 tax return, which I am currently working on now. Or because I made the repayment of taxes on Jan 2020, does this mean I cannot do this until next year's tax return (e.g. 2020).  In other words, does it matter when I made the repayment in terms of claiming that overpayment of taxes in a previous year? Or can I simply apply this to the 2019 tax return.

Thanks in advance for any advice you can provide. 

[Opus 17]

Since you paid in 2020, you report it on your 2020 tax return.  

[Anonymous]

Thanks @Opus 17 ! Appreciate the quick response. 

I did find this article (https://www.investopedia.com/terms/s/section-1341-credit.asp) while I was waiting for a reply on this thread, which confirms your statement, that you would have to do it in the tax year you paid. 

Thanks again. Just out of curiosity. I'm just wondering, since I received the W-2C from my employer for the 2018 tax year. The only issue I have is that the Box 1 and 2 were left blank, while they reflected the reduction of the $10k in wages in boxes 3-6. While tweaking the Turbotax 2018 return, which I still have. If I simply update the W2 Box 1 with the original amount - $10k. The amended return calculates the proper additional refund of roughly $2000 for Fed and $200 for state. This is the amount I would be getting back as a credit in 2020 using the IRC 1341 form. 

Can I not just file the amended 2018 return now with these numbers? Is using the 1341 method just to avoid dealing with filing an amended return? I don't see why it matters to the IRS as the refund amount is the same. Is there a reason I cannot file the amended 2018 return in this way? 

Thanks!

[Opus 17]

---

@Anonymous wrote:

Thanks @Opus 17 ! Appreciate the quick response. 

Can I not just file the amended 2018 return now with these numbers? Is using the 1341 method just to avoid dealing with filing an amended return? I don't see why it matters to the IRS as the refund amount is the same. Is there a reason I cannot file the amended 2018 return in this way? 

Thanks!

---

You can't file an amended 2018 return because you actually did receive the money in 2018.  That's why box 1 and box 2 were not changed.  Taxpayers report income when actually received and deductions when actually paid.  Boxes 3-6 were adjusted because the employer has adjusted your social security credits based on your corrected wages, but you can't amend because you actually did receive that money in 2018.

However, you have correctly identified one method to calculate the amount of the IRC 1341 credit.  You may want to print a copy of the adjusted 2018 tax return and save it with your 2020 records to prove the credit amount if audited.

Your state will not allow an "IRC 1341" credit because IRC is federal code.  However, your state may have a claim of right procedure that is equivalent.  And using the desktop program will allow you to make any manual entries necessary on your state return as well. 

Now, if you know that you are anticipating a federal refund that is $2000 larger than normal, you might want to adjust your withholding on your W-4 form now.  You could get $200 per month extra take-home pay now instead of waiting until next March to get the $2000.  I haven't used the new W-4 so I'm not sure how that will work.  You can also use the IRS withholding calculator to tell you how to file a new W-4, and include this as one of your anticipated credits (along with any dependents, etc.)  If you do this, just be sure to reset your withholding for 2021 so you won't be under-withheld. 

https://www.irs.gov/individuals/tax-withholding-estimator

[Anonymous]

Thanks @Opus 17 !!

Great explanation! Completely understand the entire situation now. And thanks for the suggestion on the W4 adjustment, makes sense. 

Thanks again for the detailed responses and education! Much appreciated...have a great weekend!