Retention Bonus Payback and Form W2C

[tax_filer_11]

Context: In 2021, I was paid a retention bonus with my employer if I stayed with the company for two years. I stayed for 1 out of those 2 years and, now, I need to payback part of that bonus. My employer is filing a W-2C on my behalf and mentioned that the wages paid in a prior year remain taxable to me for that year. Additionally, they mentioned that I cannot file an amended return to reclaim the income taxes for that year, 2021 (the year the bonus was paid). They mentioned that I could, however, get a deduction for the bonus repayment in the Form 1040.  The Form W-2C will reflect and not change the wages or state/federal/income taxes from my original W-2 from 2021, but with a reduction  of the Medicare/ Social Security wages. for the income repaid. 

Questions:
1. What exactly is the process for filing a W-2C and getting a refund via Form 1040? 
2. Do I amend the tax year that the original bonus was paid to me, 2021? (I assume not based on what the employer stated)
3. Do I file the W-2C on my next year's (2023) tax year?
4. Is there any way to get the state/federal/income taxes refunded for the full bonus payment in 2021 or can i only get the social security / Medicare back for the refund?

Thank you in advance

[Critter-3]

1. What exactly is the process for filing a W-2C and getting a refund via Form 1040? 

If you repaid amounts reported as income in the prior year -

----- if the amount is $3,000 or less, it is a miscellaneous itemized deduction subject to the 2% limitation.
----- if the amount is more than $3,000, it is a miscellaneous itemized deduction which is not subject to the 2% limitation.

If the amount was received under a "claim of right" (you had unrestricted use of the funds but later found out you didn't), you have one more choice:  if the amount is more than $3,000, you can choose instead to claim a credit for the additional tax incurred by reporting the repaid amount in income.  See IRS Publication 525 for an explanation of that method.  It is available at:  http://www.irs.gov/publications/p525/ar02.html#d0e9279

Look under deductions and credits, then other deductible expenses, then less common expenses if the amount is under $3,000. 

Turbotax on-line does not support the "claim of right" computation.  Turbotax desktop, in the forms mode, permits the credit to be entered in the "smart worksheet" above line 72, but you still would need to compute it manually.

2. Do I amend the tax year that the original bonus was paid to me, 2021? (I assume not based on what the employer stated)   NO
3. Do I file the W-2C on my next year's (2023) tax year?  NO
4. Is there any way to get the state/federal/income taxes refunded for the full bonus payment in 2021  see above #1 for fed ... check with your state for their procedure

or can i only get the social security / Medicare back for the refund?  https://www.irs.gov/forms-pubs/about-form-843

[Mike9241]

Repayment this is covere dby oRC 1341 and the related regultions

since repyament  occured in the following year the repayment AND the repayment was more than $3,000 you
can take as a deduction in th eyear of repayment on schedule A line 16 denote as IRC 1341 repayment OR
recompute the taxes in the year you received the payment by excluding the amount repaid.
the decrease in taxes is taken as a credit in the year of repayment on schedule 3 line 13d denote as IRC 1341

there is no longer a 2% reduction if you use schedule A. 

When determining whether the amount you repaid was less than $3,000, consider the total amount being repaid on the return. Each instance of repayment isn't considered separately.

unlesss it is more than $3,000 you cannot claim the repayment as either an itemized deduction or tax credit.

for more info and examples see IRS PUB 525 page 37

https://www.irs.gov/forms-pubs/about-publication-525 

[tax_filer_11]

Thank you both for your response. Based on the information shared, it seems that I should deduct the amount repaid in the repayment tax filing year (2023 in this case) since the amount paid was over $3,000. I would then include the amount I owe, over $3000, in "other deductible expenses and "claim of right payment over $3,000" and input the amount repaid.  Is that correct? 

If so and to confirm, is there anything that I truly need the W-2C for? Is this for just record keeping? Just trying to understand what specifically I need to do with the W-2C

[Mike9241]

you get to choose between taking a schedule A tax deduction in the year repaid for the gross wages repaid or a tax credit in the year repaid based on how much in income taxes you paid in the year of receipt on the amount repaid. This is done by refiguring the taxes for the year of receipt by excluding the gross wages repaid.

deduction or tax credit, which is better?  you have to figure both ways!

the w-2C for the year of receipt would only. reflect a reduction in boxes 3,4,5,6 and no amended return need be filed. 

not sure what you're talking about. "I would then include the amount I owe, over $3000, in "other deductible expenses and "claim of right payment over $3,000" and input the amount repaid.  Is that correct? 

only one entry on the 2023 tax return for this.  either an itemized deduction on schedule A or a tax credit on schedule 3. 

[tax_filer_11]

Understood, then is the W-2C just used as a receipt and reference to help me calculate the credit or deduction amount? I am just trying to see if I need to input this information anywhere in TurboTax or just use it for the calculations for a deduction or credit. I ask because my employer mentioned I would need to give my W-2C and my receipt of payment to the IRS, but not sure if this is required unless asked by the IRS.

Additionally, I signed a form that I CANNOT claim FICA tax credit or refund and that they will file the FICA tax refund on my behalf for the year I received the bonus. Does anything change on how I can proceed with the schedule A or a tax credit?

Thank you for the help!