Since you repaid more than $3,000, you have a choice of two ways to report the repayment on your 2024 tax return. You can claim either an itemized deduction for the amount you repaid, or a credit that is determined by a recalculation of your 2023 tax return. You can choose whichever makes your 2024 tax lower.
The deduction is relatively easy to enter in the TurboTax interview, but it's an itemized deduction. You will not get any benefit from it unless your total itemized deductions are more than your standard deduction. And you will not get the full benefit of the deduction unless your other itemized deductions, without the repayment, are more than your standard deduction. But if you are already itemizing deductions for 2024, the itemized deduction is a good choice.
If you simply enter the repayment in TurboTax, it will use the itemized deduction method, whether or not it gives you any tax benefit. Here's how to enter the itemized deduction in TurboTax.
- Go to Federal Taxes > Deductions & Credits > Other Deductions and Credits > Other Deductible Expenses.
- The first screen asks if you paid any generation-skipping taxes. If you didn't, click No.
- The next screen asks if you had any "less common expenses," one of which is repayments of $3,000 or less. You repaid more than $3,000, so click No.
- The next screen asks if you have certain other expenses. Click Yes.
- On the next screen, enter the total amount that you repaid in the second box, labeled "Claim of right repayment over $3,000." Then click Continue.
The deduction will appear on Schedule A line 16.
The second, more complicated option is to claim a credit, which would directly reduce your 2024 tax by the amount of the credit. If you would get some benefit from the itemized deduction, you should try both options and use the one that makes your tax lower. You can read all the details of both options under "Repayments" in IRS Publication 525. The discussion in Publication 525 calls the itemized deduction "method 1" and the credit "method 2."
There are two possible complications in claiming the credit. First, you didn't say whether you are using the desktop TurboTax software or TurboTax Online. There is no way to enter the credit in TurboTax Online because it's not covered in the TurboTax interview. The credit can only be entered in forms mode in the desktop TurboTax software.
The second complication is that TurboTax will not calculate the credit for you, or compare the deduction and credit to see which is better. You have to do all the calculations yourself. To calculate the credit (method 2) you have to recalculate your 2023 tax return. You can't do that in TurboTax Online. If you used TurboTax Online for 2023 you would have to download your .tax2023 data file, then use the desktop TurboTax software for 2023 to do the recalculation. You could call customer service, explain the situation, and see if they will give you a free download of the 2023 software. You don't file the recalculated 2023 tax return.
Here's how to enter the credit in the desktop TurboTax software. In forms mode, open the "Form 1040 or Form 1040-SR Worksheet." Scroll down to the "Other Credits and Payments Smart Worksheet" near the bottom. Enter the credit that you calculated on line D of the "Other Credits and Payments Smart Worksheet." The repayment will then appear on Schedule 3 line 13b, "Credit for repayment of amounts included in income from earlier years."
Note that the procedures above will only address your federal income tax. If you also paid state income tax on the bonus, you will have to do some research on your own to see if your state has a claim of right procedure and how to use it.
