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 . . .
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.
Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1).
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
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 . . .
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.
Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1).
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
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?
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.
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?
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?
How did that turn out? Did you have issues process the credit at the service center?
@DLMCPA You are actually responding to an older post, that is likely even older than the date stamp on the post. If you have a new question on this subject, you may want to post a new question to get fresh eyes on the subject.
As far as processing the credit is concerned, all of that is ultimately determined by the IRS. They can ask for proof regarding any tax claim, and for this particular subject may be more prone to do so. As with anything tax, accurate records are the key to responding to an IRS questions.
I'd like to take an IRC 1341 deduction on my 2020 Federal Income Taxes for $5,000 of Unemployment Compensation paid and reported in 2019, then repaid in 2020, as a result of losing an appeal with the State of Missouri. Using TurboTax, with the current Federal tax forms, what are the instructions to document this on the tax forms, so I receive the tax credit?
For my Missouri Income Taxes, do I amend my 2019 Missouri Income Taxes or take a deduction similar to an IRC 1341 on my 2020 Missouri Income Taxes? If I take a deduction similar to an IRC 1341 on my 2020 Missouri Income Taxes, again using Turbo Tax, what are the instructions to document this, so I receive the tax credit?
If the amount you repaid was more than $3,000, you can deduct the income you repaid on your 2020 tax return. [It is not a credit.] To do this, please follow these steps:
The amount will appear on Schedule A, line 16.
Missouri does not have a claim of right doctrine similar to the Internal Revenue Service. However, claiming the IRC 1341 deduction on your federal return reduces your taxable federal income, which, in turn, reduces your MO taxable income.
No. The "claim of right repayment" is a deduction from income not a credit.
You are saying that a Claim of Right Repayment (IRC 1341) can be taken exclusively as a miscellaneous income deduction on Schedule A, Line 16, which is entered on Line 33 of the Miscellaneous Itemized Deductions Worksheet. What is the Claim of Right Repayment (IRC 1341) tax credit on Schedule 3, Line 12D, which is entered on Section A, Line 12D of the 1040/1040SR Worksheet? My income repayment was $3,000+.
As @GeoffreyG stated, if you are repaying more than $3,000 you have the option of either taking a miscellaneous itemized deduction or a tax credit.
For tax years beginning after 2017, you can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, you aren’t able to deduct it from your income in the year you repaid it.
The Claim of Right Repayment (IRC 1341) tax credit on Schedule 3, Line 12D is the credit for the prior year tax that was paid due to the income repaid, i.e. it is the difference between the tax with and without the repaid income.
See Repayments.
My repayment is less than $3,000. Where do I input this amount? It was an overpayment of a bonus from the prior year that was repaid this year.
So just to clarify, if my employer (the US Government) made a mistake and overpaid a bonus to me by $2,500, I will be stuck paying tax on it twice? I haven't had much success in trying to them to rectify the situation. Any suggestions?
Unfortunately, the itemized deduction for amounts less than $3,000 is not available since the TCJA took effect in 2018. The only real option is to pay it back without a tax benefit.
I have a question I can't find an answer to.
If income in 2019 is overstated because in 2020 the TP had to repay it - why can't 2019 be amended to reduce the income in that year? I'm looking at helping a person who included income on their 2019 return - paid say $4,000 in taxes on it. Now 2020 comes along and he has to repay half of it. Would the TP get a refundable credit of $2,000 on the 2020 return? The 2020 return shows only retirement income and social security so when the standard deduction is put in the TP has zero income and zero taxes. Thanks!
I would like to take my $11k+ repayment to my pension plan for tax year 2020 as a deduction for tax year 2021. However, I do not plan to itemize my return and plan to take the standard deduction for me and my wife. Can I still deduct the 11k repayment and combine the standard deduction of 26.5k? Or will I need to take the credit?
Q. Can we deduct the 11k repayment if we use the standard deduction of 26.5k? Or will I need to take the credit?
A. You need to take the credit. The deduction is ONLY available as an itemized deduction.
So what you are saying is I lose the taxes I paid on the $2800 I paid back to the SSA in 2021 that they overpaid in 2020? That does not seem fair or right. Why is there no way to get this back?
"Why is there no way to get this back? "
You will have to ask your congressional representative. Congress made the rule that for amounts less than $3,000, you would have to apply this to your itemized deductions, and then later, eliminated many itemized deductions (the ones like this) in the Tax Cut and Jobs Act of 2017.