Repayment of disability insurance funds

[Troutbum89]

Preface: I am familiar with IRS Publication 525
We had to repay disability insurance funds to an insurance company based on approval of Social Security disability. This approval happened in late 2023. We attempted to get this process completed before the end of the year, but the insurance company did not process the transaction until early 2024. The repayment applies to 2022 and 2023. The W-2 the insurance company sent me for 2023 reflects none of the repayment. 

Q1: How should I handle this for tax purposes?
Q2: Is there any way for me to apply any of this to my 2023 taxes, as my AGI looks greatly exaggerated based on this timing issue, and will result in a large tax liability on funds I did not get to keep? Is there any leeway with the reporting considering the repayment technically did not get done in 2023? Do I have any right to ask the insurance company to generate a corrected W-2?

[ThomasM125]

You don't have a right to request a corrected W-2 form. The W-2 form you receive would reflect the income you received during the year, so the repayment you made in 2024 should not be reflected on your 2023 W-2. What you will have to do is pay tax on the income reported to you in 2023 and in 2024 when you make your repayment, you may be able to get a credit on your 2024 tax return for the extra tax you paid in 2022 and 2023 pursuant to the disability income you had to pay back. This is called a claim of right repayment. 

If you know the repayment amount applicable to 2023, you can adjust your disability income entry to determine what your tax is after the adjustment. You will need to compare that tax with your actual tax when you enter the correct disability income for 2023 to determine how much credit you are allowed from 2023 when you report your claim of right repayment credit on your 2024 tax return. 

Income repayments of less than $3,000 can only be deducted as a miscellaneous itemized deduction, which is not allowed for tax years beginning after 2017 through 2025. So, your claim of right repayment must be over $3,000 to benefit you in 2024. 

To report a claim of right repayment credit in TurboTax follow these instructions:

1. Using the desktop version of TurboTax, bring up the "Forms" mode by clicking on that icon on the menu bar
2. Choose the 1040/1040SR Wks in the list of forms
3. Scroll down the 1040/1040SR Wks until you see Part II - Other Payments and Refundable Credits 
4. Enter the amount of the credit on line 12 (D) Claim of Right, IRC 1341 credit for repayments of prior year income

You may need to amend your previous year tax return to determine the change in tax. You will see on option for this on your home page in TurboTax, under Your tax returns and documents at the bottom of the page. You will not file the amended return, you just need to remove the income that was paid back to determine the tax you paid on it. It will be the difference in tax due or refunded when you remove the income you paid back.

You can download your online TurboTax program to your computer so you don't have to re-enter all of your information. You will see an option for that on your left menu bar while working on your program in TurboTax. Look for the Tax Tools menu option, then Tools, then see the option on the right to  Save your (year) return to your computer.

[Troutbum89]

Thanks for the reply. My own efforts to find a resolution to this in which I am not going to have to pay a large amount of tax on income I sent back to the insurance company a matter of weeks later have so far been fruitless. It appears that there is no way to avoid this situation, despite how innately unfair the whole thing is. 

In any case, thanks again. I have done my homework on the "Claim of Right" procedure, and I have a good feel for what that will entail, though it will be next year. I'll post an update if anything changes.