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What is the IRC 1341 repayment credit in layman's terms?

 
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What is the IRC 1341 repayment credit in layman's terms?

Dear traceyrhering:

Internal Revenue Code (IRC) Section 1341 repayment credit is one of the two options that a taxpayer has (the other being a tax deduction) when the taxpayer is faced with a situation known as a Claim of Right.

A Claim of Right is, in simple layman's terms, basically the case where a taxpayer reported income as being taxable in one year, but then has to repay it back in a future tax year.  An example of this would be where a retired person receives a pension payment during 2009, and then in 2013 receives a letter from the pension administrator informing them that an internal audit of the pension computer system revealed that the administrator made a mistake and overpaid benefits in 2009.  As such, they now want the pension recipient to repay (the overpayment) by writing a check back to the pension plan.  And as odd as that sounds, a variation of that very same thing happened to my own (retired) mother a few years ago.

But, the interesting tax "quirk" is that since the taxpayer already paid 2009 income taxes on the pension payment (which it turns out they weren't legally entitled to keep, after all), then there has to be a mechanism to make the taxpayer whole.  Thus arises the concept of a Claim of Right, where the IRC 1341 is one of the two choices, as I've mentioned above. 

 

Hopefully that helps you to understand the basics.

 

Now then, a taxpayer can either claim a deduction or a credit for this repayment, and here's how it works mechanically . . .

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction.   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repayment over $3,000.   If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction ). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.

Method 1.   Figure your tax for 2013 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2.   Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.
  1. Figure your tax for 2013 without deducting the repaid amount.

  2. Refigure your tax from the earlier year without including in income the amount you repaid in 2013.

  3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.

  4. Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1).

  If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71.


If you choose a deduction, please enter it here:

Federal taxes - Deductions & credits - I'll choose what I work on - Other deductions and credits - Other deductible expense

Please answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Please enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

If you choose a credit (This can only be done in the Forms mode of the Desktop version of TurboTax), please enter it here:

FORMS - F1040 - Below line 70 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 71.

I've included a link to the IRS website for your reference:

http://www.irs.gov/publications/p525/ar02.html#en_US_2013_publink1000229600

Thanks for asking this important question, and good luck to you!

Regards

View solution in original post

7 Replies
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What is the IRC 1341 repayment credit in layman's terms?

Dear traceyrhering:

Internal Revenue Code (IRC) Section 1341 repayment credit is one of the two options that a taxpayer has (the other being a tax deduction) when the taxpayer is faced with a situation known as a Claim of Right.

A Claim of Right is, in simple layman's terms, basically the case where a taxpayer reported income as being taxable in one year, but then has to repay it back in a future tax year.  An example of this would be where a retired person receives a pension payment during 2009, and then in 2013 receives a letter from the pension administrator informing them that an internal audit of the pension computer system revealed that the administrator made a mistake and overpaid benefits in 2009.  As such, they now want the pension recipient to repay (the overpayment) by writing a check back to the pension plan.  And as odd as that sounds, a variation of that very same thing happened to my own (retired) mother a few years ago.

But, the interesting tax "quirk" is that since the taxpayer already paid 2009 income taxes on the pension payment (which it turns out they weren't legally entitled to keep, after all), then there has to be a mechanism to make the taxpayer whole.  Thus arises the concept of a Claim of Right, where the IRC 1341 is one of the two choices, as I've mentioned above. 

 

Hopefully that helps you to understand the basics.

 

Now then, a taxpayer can either claim a deduction or a credit for this repayment, and here's how it works mechanically . . .

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction.   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repayment over $3,000.   If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction ). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.

Method 1.   Figure your tax for 2013 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2.   Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.
  1. Figure your tax for 2013 without deducting the repaid amount.

  2. Refigure your tax from the earlier year without including in income the amount you repaid in 2013.

  3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.

  4. Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1).

  If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71.


If you choose a deduction, please enter it here:

Federal taxes - Deductions & credits - I'll choose what I work on - Other deductions and credits - Other deductible expense

Please answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Please enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

If you choose a credit (This can only be done in the Forms mode of the Desktop version of TurboTax), please enter it here:

FORMS - F1040 - Below line 70 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 71.

I've included a link to the IRS website for your reference:

http://www.irs.gov/publications/p525/ar02.html#en_US_2013_publink1000229600

Thanks for asking this important question, and good luck to you!

Regards

View solution in original post

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What is the IRC 1341 repayment credit in layman's terms?

Thanks for the info!
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What is the IRC 1341 repayment credit in layman's terms?

You're very welcome.  That's why we're here!  🙂
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What is the IRC 1341 repayment credit in layman's terms?

So if I received over $3000 in 2013 and repaid over $3000 in 2014 and I wanted to choose the tax credit, do I fill in line 71 for 2014's tax return or amend 2013's tax return to include that credit?
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What is the IRC 1341 repayment credit in layman's terms?

The instructions are to claim a credit for taxes paid in the year you repaid the income, so that would be 2014 in your case.
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What is the IRC 1341 repayment credit in layman's terms?

I understand there have been changes in Turbotax for this year. I want to make sure before buying the desktop version. Is the forms mode available to edit Line 71 to enter repayment amount for IRC Section 1341 on 1040?
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What is the IRC 1341 repayment credit in layman's terms?

How if any does this take new treatment for 2019 for SSA retirement benefits repaid i n 2018 but not posted by SSA until 2019?

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