Hi there, last year (2016) I was paid a relocation bonus of ~$8,000 that was included in my W-2 for 2016. I left the company in 2017 and the company is asking me to pay the entire $8,000 back. I only received ~$5,000, because the rest was paid as taxes. I'm assuming I can get the $3,000 back because I no longer had that income in 2016. Can I claim a deduction in my 2017 taxes? Or do I file a corrected W-2 for 2016?
You assume incorrectly ... since the payback amount is more than $3000 you have a choice to make on your 2017 return ...
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
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.
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 be 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)