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

[ErnieS0]

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.

[LCM]

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.  

[LCM]

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?

[AmyC]

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.

[CSKcpa56]

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!

[heybrian1]

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?

[Hal_Al]

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. 

[DLMCPA]

There are two choices you take a deduction or the credit.

[DeafSheltieMom]

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? 

[BillM223]

"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.

[DLMCPA]

You have two choices:

1. Take a Deduction if you itemize or it is lost if you do not itemize

2. take credit for what the tax paid would have been.  The credit was what I took for a client two years ago. They did not itemize.  I got the client a significant refund.  It was scrutinized but we sent additional data and they refunded the client and paid interest, too.

[frostedpandaz]

What if the overpayment is not paid back in one lump sum?

I was over paid $3900 in wages in 2020. I paid it back with installments starting in 2021 but the whole amount wasn't completely paid back until Feb 2022. Can I claim a tax credit on my 2021 return? Or should I wait and claim the whole credit on the 2022 return next year?

[LenaH]

It depends. You can only use the "claim of right" Section 1341 credit if the amount is over $3,000 repaid per tax year. You cannot take the credit in 2022, if you repaid some of it in 2021. However, it sounds like you may have repaid more than $3,000 in 2021, which would qualify you to take the claim of right credit for the tax year 2021. If so, you cannot include the amount repaid in 2022. 

The "claim of right" Section 1341 credit can be claimed as either an itemized (miscellaneous) deduction or as a credit. The deduction is the simpler way to claim your repayment, but a credit might save you more money.

For an explanation of the methods and how to calculate your amounts for the Section 1341 credit, please see Publication 525 and go to page 36. Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

To enter as an itemized deduction, please follow the instructions below:

1. Open your return.
2. Click on Federal.
3. Click on Deductions and Credits.
4. Scroll down to Other Deductions and Credits and Click Start next to Other Deductible Expenses.
5. Answer Yes to the question Did you have any of these other expenses?
6. Enter the amount. 

If you decide to claim your repayment of over $3000 as a credit, follow the information in Publication 525. This requires a special computation, and you would need to use a Desktop version of TurboTax and enter your credit using the Forms mode.

@frostedpandaz

[CuriousAD]

How to apply these credits to a state return? E.g. I claimed overpayment in my federal return my state tax return (Pennsylvania) PA40 form through Turbotax desktop does not show this tax credit. How do I claim the overpayment of PA state taxes under 1341?

[DianeW777]

It doesn't appear as though Pennsylvania (PA) allows this deduction.  The following links are posted here for your review.

• PA Deductions & Credits
• PA 40 Instructions 2022
• How do I contact my State Department of Revenue?

@CuriousAD