@ashbeth22 wrote:
@rjs Sorry about the confusion.
So the sick pay was received in 2016.. and repaid partially in 2020 and finished in 2021.
$6292.46 in 2021
$12288.48 in 2020
Yes it was taxable income in 2016 in box 1. Box 13 Third-party sick pay in checked.
I am preparing 2021 taxes. He also received sick pay in 2021 from the same company which was reported on a W-2. However the amount repaid is not reflected on the W-2. Where his taxes sit right now it appears he has to pay in several thousand in taxes. I'm just trying to make sure I record this repayment in the correct way and hopefully lower his tax bill if that is possible.
2016 is done, the W-2 shows what he actually received at the time and that's how it's reported and taxed.
For 2020, he has a "claim of right" for the amount of repayment.
For 2021, the W-2 showing the 2021 benefits is what must be reported and taxed, because that's what was actually received. But, he also has a claim of right with respect to the repayment during 2021 of the 2016 disability pay.
A claim of right occurs when you have to repay income that you previously paid tax on, as long as the taxpayer had a reasonable belief that they were entitled to the money at the time. There are two ways to report this.
1. As a special itemized tax deduction that is not subject to the 2% rule. This deduction is still allowed even though some other itemized deductions were removed by the 2017 tax reform. However, this will only benefit the taxpayer if they have enough other itemized deductions that they were already planning to itemize
2. A special tax credit, where the taxpayer needs to go back to the original tax return (in this case 2016) and figure out how much less his tax would have been if he had not included the repaid part of the income. For example, if he reported $50,000 in 2016, you would need to figure out what his 2016 taxes would have been if he had only been paid $43708 (50000 minus 6292 repayment). That difference is the credit you claim on the 2020 tax return. Repeat the calculation for 2021.
In other words, on the 2021 tax return, you either
a. take a special itemized deduction of $12,888, or
b. figure out how much you overpaid the 2016 taxes because of that $12,888, and claim that amount as a direct credit on your 2021 tax return.
Turbotax can't figure the amount of the tax credit for you, you have to do it yourself. Turbotax also can't tell you if the tax credit or the special itemized deduction will result in lower overall taxes for 2020 and 2021, you have to figure that out yourself too. Because the 2017 tax reform law lowered the tax rates, it may be that the credit will save more money than the deduction. But it also depends on his overall income, deduction and other credits, so there's no obvious answer without doing the math.
For 2020, you would need to file an amended return.
Lastly, to use the credit (instead of the deduction), you need to be using Turbotax installed on your own computer, so you can make a manual entry to the form. The credit is not included in the online program.
I'm sure someone else will post the specific instruction of how to make the correct manual entry.
