Repayment over $3,000. If the amount you repaid was more than $3,000, you can recover the tax you originally paid using one of two methods. You can do it as a deduction on schedule A or a tax credit on line 73 of the 1040 form if when you included the income in a previous year, it appeared that you had an unrestricted right to it.
Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.
Method 1. Claiming a deduction for the repaid amount. You deduct it as a miscellaneous itemized deduction on Schedule A line 28.
This is the flow in TurboTax:
Federal taxes > Deductions & credits > I'll choose what I work on > Other deductions and credits > Other deductible expense>Go thru to third screen> answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"
Enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).
Method 2. Figure your tax claiming a credit for the repaid amount. Follow these steps.
- Figure your tax without deducting the repaid amount.
- Refigure your tax from the earlier year without including the income that you had to be repaid.
- 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 > Scroll below line 72 to "Other Payments and Credits Smart worksheet"
Please enter the credit on line D.
Note that you claim the deduction or credit on your 2021 tax return. You do not amend your 2020 tax return.
Under the new tax law that was passed in 2017, for repayments in 2018 through 2025, if the amount that you repaid is $3,000 or less you do not get any adjustment of the tax. Some states might allow a deduction or credit on the state tax return.