My husband retired for two months from the local government and went back two months later doing the same work. Both were/are at a Local government in NC. He had to pay back over $7,000 in overpayment of retirement funds. When he received the 1099-R, the whole payment was shown in boxes 1 and 2a. How do I deduct the 7,000 he paid back to the Local government retirement system?
Generally, there wouldn't be a deduction in this situation, but the funds wouldn't be taxed when withdrawn again later.
If the retirement payments were made in error and returned in the same year, there shouldn't be any taxable income.
If a person retires and starts receiving regular annuity payments, then returns to work and then redeposits funds into the retirement system to add to their future benefits, then taxable pension income was received and there isn't a deduction at that time. However, since the funds were already taxed, they would normally be treated as a return of contribution and not taxed again when they ultimately retire again.
If he is covered under the TSERS system in North Carolina:
Retirees drawing retirement benefits from TSERS must be retired for at least six months before returning to work in North Carolina state government. Retirees who perform work with a North Carolina state government employer within six months of their retirement are subject to TSERS financial penalties. See here for more information, or contact the pension system office directly.
Income from a pension, 401(k), IRA or any other type of retirement account is all taxed at the North Carolina state income tax rate of 4.75%. Unlike many other states, North Carolina does not allow deductions on any type of retirement income. The income tax on pension income is paid through the state return.
The exception is for certain government retirement income. As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the state of North Carolina and its local governments or by the United States government retirees (including military).
The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers' and State Employees' Retirement System, the North Carolina Local Governmental Employees' Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees' Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989.
The exclusion also applies to retirement benefits received from the state's §401(k) and §457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.
See this North Carolina DOR article for more information.