I was overpaid by DFAS in 2008 and the overpayment was established as a debt. I paid on the debt in 2012 and I received a certificate for income tax adjustment for 2012. How do I account for that on my taxes?

  • when i include this in miscellaneous deductions it applies the 2 percent rule and therefore disallows it.  How do i include it in full without the 2 percent rule
  • Go back and delete that entry and just keep working through the interview.  At some point you'll come to a page that asks something like "Do you have any other deductions not subject to the 2% rule" (which makes it sound like you've been entering items not subject to the 2% rule all along) and answer "YES".  That will get you to the right spot.
If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040).

If during the year you repaid more than $3,000 you can also deduct this on Schedule A but, alternatively, you can take a tax tax credit for the year of repayment, whichever provides the most benefit.  In order to claim a credit you'd need to have your 2008 tax file and the 2008 program still installed on your computer.

Method 1

Figure the tax for the current tax year, claiming a deduction for the repaid amount.  Repaid wages must be deducted as a miscellaneous itemized deduction.

Method 2

Figure the tax for the current year claiming a credit for the repaid amount following these steps.

1.      Figure the tax for the current year without deducting the repaid amount.

2.      Refigure the tax from the earlier year without including in income the amount repaid during the current year.

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

4.      Subtract the answer in (3) from the tax for the current year figured without the deduction (step 2).

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 70, and enter “I.R.C. 1341” in the column to the right of line 70.

The IRS discussion about claim of rights is here: http://www.irs.gov/publications/p17/ch12.html#en_US_2011_publink1000172015

Tom Young

  • How do I apply any of this to TurboTax?
  • Yeah, I'd like to know too please.
  • this is bullcrap.... just give a me G and call it even!!!!!
It's pretty easy, assuming you have TT installed for the original overpayment year.

First, you determine if it's better to take the deduction or credit.

If you take the deduction then under the "Deductions & Credits" tab you scroll all the way down to "Other Deductible Expenses" under "Other Deductions and Credits".  You page through the interview until you come to the page "Any Other Deductions" and you enter a description and an amount there.

If you decide to take the credit you have to use "Forms" mode (available in desktop TT, I have no idea about online TT) and make the entry on the Form 1040 "Other Credits and Payments Smart Worksheet".  (See attached)

Tom Young
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