Repayment of signing bonus in subsequent year

[Msrain]

Thank you so much! That is exactly what I'm looking for. Yes, the bonus was paid to me in 2022, and I paid it back in 2022, so I was told to pay back the net $7500 rather then the gross $10,660.98. They already took care of the social and medical, and that reflects on the current w2c they sent (box 3 & 5 show wages minus the $10,660.98 bonus).  To be clear, I enter the net amount, and not the gross of the bonus in the section you suggested? I'm still hoping they correct it on their side and issue the corrected w2 showing box 1 without the $10,660.98 added in like it currently does. Thank you again. 

[DianeW777]

Yes, you enter only the amount of the actual repayment of $7,500.  Even with a corrected W-2 for social security and medicare, if they do not reimburse you for the extra tax they originally withheld, use Form 843 after you have discussed this with your employer. You would send the original and the corrected W2/W2c if you file the claim of refund.

[Msrain]

Thank you again for being so informative! I'll have to look into how to file form 843 in that case. It looks like my best bet is if the company were to just issue a corrected w2. I really think the corporate office handling it didn't realize it was paid back in the same year because their advise to me was to file irc1341. I asked my hr rep to clarify with corporate that the repayment was made in the same year, so hopefully that could clear it up and they could issue the corrected w2. Hopefully, all works out well. Thank you again! 

[ESPalm]

@Opus 17or any tax experts, I now have the same issue.  I was paid the bonus in 2021 which was reported as part of my income in 21 return.  I left the job and they asked me to authorize a FICA exemption for the company (or something like that) so I returned the bonus minus FICA in 2022.  The company issued a W-2C for 2021 with verbatim instructions and new amounts only for boxes 3,4,5,6. 

My 2021 return (MFJ) said standard deduction was better than using itemized so we did and received a refund that year.

In 2022, we also have solar installation to deduct.  How should we file this refund to get appropriate tax credit?  When I tried to do "amend a return" from our 2021, it said I owed tax so I'm sure I didn't do it right.  I'm unclear whether to go into 2021 and do amend a return or do something within the 2022 return I'm filing.

Thank you for your guidance.

[Cynthiad66]

You should amend 2021 tax return for the corrected W-2C for 2021.  Prepare 2022 tax return based on the income and deductions for 2022.  You cannot adjust 2021 issues on the 2022 return.

If you have additional questions, please return to the forum.

@ESPalm

[ESPalm]

Cynthiad66, Thank you for the information but something doesn't seem right to me.  If my income was technically reduced in 2021 for the signing bonus I returned in 2022, why would I owe the IRS tax?  The 2021 return was primarily standard deductions plus a small amount of QBI.

What are the steps to file this correctly, or is the fact I need to return part of my refund accurate because the company did not change?  Should they have corrected it?   Thank you.

[ESPalm]

Just found the original email asking for the bonus back.  Here is what they included:

Special tax rules apply if the gross wages were processed to an employee’s compensation and, in a subsequent year the employee repays the unearned portion of the wages/bonus. In accordance with IRS requirements (see IRC 1341 and the IRS "Instructions for Form W-2C"); the wages paid in the prior year remain taxable to the employee for that year. The employee is not entitled to file an amended return to recover the income taxes on those wages.  Instead, the employee is entitled to a deduction (or credit, in certain cases) for the repaid wages on his or her Form 1040 for the year of repayment.

Upon repayment, the firm will file a Form W-2C for the year that the wages were included in your W-2. The Form W-2C will reflect a reduction in Medicare wages and, if applicable Social Security wages equal to the amount of taxable income repaid. The Form W-2C WILL NOT change the amount of your federal and applicable state taxable wages or income tax withholdings from the amounts reported on the original W-2.  For additional information, please refer to IRS Publication 525, Taxable and Nontaxable Income, and the instructions to Form W-2C as a reference.  In order for us to process your W2C and obtain a refund of your Social Security and Medicare tax overpayment, please sign and return the attached FICA consent form via email to the xyz mailbox.

It sounds like I need to claim this as a credit in my 2022 tax return (I received it in 2021, repaid it in 2022)?  Do I file it under the other credits as an earlier comment seemed to recommend?  Or should I claim it as a negative income (if that's even possible)?  They told me IRS considers the money used in 2021, which is why they are not adjusting any of the other boxes in the W-2.

[DianeW777]

It seems the wages for federal income tax were not adjusted for your repayment.  You can follow the instructions below to use IRC 1341 because of the repayment in 2022.

The information on your options and how to make the entry is provided here and it is called Claim of Right.

Claim of Right

• If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

Taking the Income Reduction in TurboTax

1. Login to your TurboTax account or open your tax return.
2. Click on Federal Taxes and then Deductions & Credits.
3. Locate the section Other Deductions and Credits (you may first need to select on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop.)
4. Click Start (or Revisit) beside Other Deductible Expenses.
5. A number of questions will appear on the upcoming screens. You are looking for the one that reads Claim of right repayment over $3,000. Click yes when you see this screen. (Be sure to ignore the similar question, repayments of $3,000 or less.)
6. Enter the amount of the repayment in the box Claim of right repayment over $3,000 and click Continue.

Taking the Credit in TurboTax

There are two components to taking the credit in TurboTax. The first part entails determining the amount of the tax that was overpaid in the year the income was received. This requires using the TurboTax Desktop product (or another method) to determine what the tax liability would have been without the income. 

1. The credit can only be applied using the TurboTax Desktop product installed on a computer, in the Forms mode.
2. Switch to Forms mode by clicking on Forms icon in the program.
3. In the list of forms on the left click on 1040/1040RSR Wks above the Form 1040 itself.
4. Scroll down to Other Credits and Payments Smart Worksheet (near the bottom) and enter the amount that you have computed on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
5.  Click on the Step-by-Step or Easy Step icon in the upper right corner to return to the interview mode and finish working on your tax return.

[ESPalm]

Thank you for the explanation of the language.

Two more questions

1 - Is "least tax" referring to the tax I would pay for 2022?

2 - Do I just prepare the Turbotax file both ways to see the tax results?  Or would Turbotax select the right option for me if I complete both areas?

[MonikaK1]

If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year if the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

"Least tax" in this case means overall - the lowest tax impact you achieve by either reducing your income by the amount repaid or taking a credit against your tax for the year repaid.

You would do this yourself, using the steps previously provided to determine which way results in the lowest tax impact.

If you reported the full amount of income you received on your 2021 return, and the amount you had to repay in 2022 was less than $3,000, you can generally report the amount repaid as a negative number in the same income area as the income was reported.

See this TurboTax article on Claim of Right repayments.

A Claim of Right Repayment is a deduction you can take in the current tax year if you’re required to pay back income in excess of $3,000 from a previous tax year that you thought you could keep. You reported and paid taxes on the money, not knowing you’d have to pay it back.

While you still have to repay the money, there are a couple of ways you can get a tax break by reporting the repayment on your current year's tax return:

1. Take a simple deduction of the repaid income from the current year’s income (this is the easiest option for taxpayers who itemize their deductions)
2. Use TurboTax CD/Download to calculate the amount of tax you overpaid and take a refundable credit
   • This may be the more valuable option, though it requires a bit more work. More details appear in the article.