In 2016 I repaid a salary amount of $3,332 reported as income in a prior year. Can I deduct the amount repaid from my income when I file my 2016 tax return?

[roofleak--]

Where do I enter this information in Turbotax?

[TomYoung · Accepted solution]

"Can I deduct the amount repaid from my income when I file my 2016 tax return?"

Yes under the "claim of rights" doctrine you claim the repayment as either a tax credit this year or as an itemized deduction.

If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040) on your 2016 income tax return.  As you paid more than $3,000 you might think this doesn't apply to you, but it might, so read on.

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 credit for the year of repayment this year, whichever provides the most benefit.  In order to claim a credit you'll need to be able to re-figure your 2015 income taxes without those overpayments included.  You then take the difference between what you actually paid in taxes in 2015 and what you should have paid in taxes without the overpayments and claim that amount as an income tax credit on your 2016 Form 1040.

So, you have two methods of handling the repayment in your taxes:


Method 1 - Itemized Deduction

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 - Credit for prior year taxes paid

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 (2016) without deducting the repaid amount.
2.     Refigure the tax for 2015 without including in income the amount collected in that year and repaid this year.
3.     Subtract the tax in (2) from the tax shown on the originally filed 2015 income tax return.  This is the credit.
4.     Subtract the answer in step 3 from the tax for the current year figured in (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 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: https://www.irs.gov/publications/p17/ch12.html#en_US_2016_publink1000172015

If you intend to claim the credit I believe you will have to use the "desktop" version of TurboTax, switch to "Forms mode" and manually input the amount on the face of the Form 1040 in the "Other Credits and Payments Smart Worksheet"  that's between lines 72 and 73 on the Form.

OR

If you take the deduction go to the "Deductions & Credits" section of TurboTax and scroll way down the page to the "Other Deductible Expenses" interview.  That's where the claim of rights deduction is entered.

Tom Young

[tanykim]

Can you clarify the step 2 of Method 2? How can I refigure the last year's tax? Should I use desktop version of last year's Turbo Tax? Let's say I repaid 50K, then what should I change, is that taxable income in W2? Thanks!!

[TomYoung]

Yes, you need to use a desktop version at this point.  For purposes of calculating the prior year's taxes you remove it from where ever it originally was recorded.

[tanykim]

Thanks. Regarding 1, what do you mean exactly about "this year's tax"? Is it what I already paid, or what I supposed to pay? How can I know it from Turbo Tax? Sorry it seems like a really basic question.

[TomYoung]

Assuming "Regarding 1" refers to "Method 1 - Itemized Deduction" then in the context of the original question that would be 2016.

[BradFulton1972]

I typically don't itemize my deductions, and if even with my repayment deduction, my itemized deductions total is still less than $24,800, it appears that using Method 1 would not provide any additional tax benefit (i.e., I would still be taking the standard deduction). Am I understanding this correctly? 

[Critter-3]

Correct.