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What is a claim of right repayment?

by TurboTax•242• Updated 2 months ago

A Claim of Right Repayment is a deduction you can take in the current tax year if you’re required to pay back income in excess of $3,000 from a previous tax year that you thought you could keep. You reported and paid taxes on the money, not knowing you’d have to pay it back.

Examples of this type of income include: the repayment of signing bonuses, moving expenses, unemployment compensation, and other funds.

While you still have to repay the money, there are a couple of ways you can get a tax break by reporting the repayment on your current year tax return:

  • Take a simple deduction of the repaid income from the current year’s income (this is the easiest option for taxpayers who itemize their deductions).
  • Use TurboTax Desktop to calculate the amount of tax you overpaid and take a refundable credit.
    • You should test both methods and use the one that results in the lower overall tax. 

Whichever option you choose, we’ll walk you through the steps.

  1. Go to the Did you pay any generation-skipping taxes in 2024? screen.
  2. Answer the questions until you arrive at the Did you have any of these other expenses? screen, and select Yes.
  3. On the Tell us about your other expenses screen, enter the amount of the repayment in the Claim of right repayment over $3,000 box and select Continue.

Note: You may need to install the software and transfer your online data to the Desktop program first.

There are two steps to taking the credit in TurboTax: figuring the credit, and applying the credit.

First, you’ll need to determine the amount of tax that was overpaid in the year you reported the income.

You can manually calculate the amount, or you can use TurboTax Desktop to calculate it for you. Make sure you use the same version of TurboTax that you used when you paid the taxes.

Figuring the credit

  1. Sign in to your account.
  2. Select the return for the year you received the money (for example, if you're repaying money you received in 2023, open your 2023 tax return).
  3. Select Save As in Windows or Copy in Mac to save a copy of the return. This is the form you'll be working in for this part.
  4. Select Forms in the upper-right corner.
  5. Select Form 1040 from the list on the left to open the form (or Form 1040-SR, if applicable).
  6. Find the Total Tax line and make a note of this number.
  7. Adjust the income you originally reported by subtracting the amount you repaid. For example, if you reported $50,000 in income, but had to repay $9,000, you'll adjust the income to $41,000.
  8. After you enter the updated income, TurboTax will automatically calculate your updated tax liability. To determine your Claim of Right Credit, subtract the amount of the updated tax liability from the original tax liability.

Next, you’ll apply the credit. To do this, you’ll need the current year of TurboTax Desktop.

Applying the credit

  1. Return to the current tax year (the credit can only be applied using the Forms mode in TurboTax Desktop).
  2. Select Forms.
  3. Choose 1040/1040SR Wks from the list and the worksheet will appear.
  4. Scroll to the Other Credits and Payments Smart Worksheet (you can find this in a box near the end of the worksheet).
  5. Enter the credit amount you calculated on Line D, Claim of Right, IRC 1341 credit for repayments of prior year income.
  6. Select the Step-by-Step or Easy Step icon to return to the interview mode and finish working on your tax return.