If the taxpayer had to repay more than $3,000 that was included in their income in an earlier year because at the time they thought they had an un-restricted right to it, the taxpayer may be able to deduct the amount they repaid or take a credit against their tax in the year that they repaid it. When 'a repayment occurs the taxpayer may (subject to the dollar limitations discussed below), (1) reduce their income in the current year, (2) deduct the amount repaid as a miscellaneous deduction on Schedule A, Form 1040 in the year in which it is repaid, or (3) take a refundable credit against tax on Form 1040, Line 74, for the year that repayment occurs. You cannot amend the prior year return. See: "Repayments" in Publication 17 - Your Federal Income Taxes.
The manner in which the repayment is deemed a reduction in income, a miscellaneous itemized deduction or a tax credit depends upon the amount of the repayment and the type of income that was included in the previous year.
If the amount repaid was $3,000 or less, a Claim of Right under IRC Section 1341 does not apply. In some cases, the amount repaid is deducted in the year of repayment on the same form or schedule on which it was previously included. This effectively reduces the income of the taxpayer in the current year by the amount which they repaid. For example, if in the prior year it had been included as self-employment income on Schedule C, the repayment is deducted on Schedule C by reducing income in the year it was repaid. See: "Repayments" in Publication 17 - Your Federal Income Taxes.
However, if the income was previously reported as wages, taxable unemployment compensation, or other nonbusiness ordinary income, it cannot be used to reduce current wages, taxable unemployment or other nonbusiness income. Instead it is deducted on Schedule A, subject to the 2% of adjusted gross income limitation. See: "Repayments" in Publication 17 - Your Federal Income Taxes.
When dealing with the repayment of Social Security Benefits or Railroad Retirement Benefits, only the repayment amount that exceeds the gross benefits received in the current year are considered. Specifically, on the SSA-1099, Box 3 will reflect the Gross Benefits, Box 4 will reflect the repayment amounts, and Box 5 will reflect the net benefit that the taxpayer received. It is the amount in SSA-1099, Box 5 (or 1099-RRA, Box 5) that a taxpayer uses to determine the taxable amount of social security benefits (railroad retirement Benefits). See: Pub 915 - Social Security and Equivalent Railroad Retirement Benefits.
If a taxpayer receives an overpayment of social security (or railroad retirement) benefits in a previous year, and then repays the social security (or railroad retirement) benefits in the current year, any repayment of benefits that are made (SSA-1099, Box 4) will be subtracted from the gross benefits that the taxpayer received in the current year (SSA-1099, Box 3) and reported on Form SSA-1099, Box 5. If the amount repaid is more than the gross benefits that were received in the current year a negative amount will be shown in Box 5 of the total Form SSA-1099 and RRB-1099. This negative figure represents benefits that were included in gross income in an earlier year.
If this negative amount is $3000 or less, it is considered a miscellaneous itemized deduction, subject to the 2% of adjusted gross income limitation and will be claimed on Schedule A (Form 1040), line 23. See: Pub 915 - Social Security and Equivalent Railroad Retirement Benefits and "Repayment of Benefits" in Publication 17 - Your Federal Income Taxes. This is done from the main menu of the 1040 return. Select Itemized Deductions Menu, 2% Deductions, Other Miscellaneous Deductions (subject to 2%), then select F10 and select 'NEW' and enter as a description such as 'SOCIAL SECURITY REPAYMENT EXCEEDING GROSS BENEFITS' and the amount.
If the negative amount in SSA-1099, Box 5 is greater than $3000, it will be considered a Claim of Right under IRC Section 1341 and it should treated as discussed below. A Claim of Right occurs when a taxpayer reported income as being taxable in one year, but then has to repay more than $3000 of that income back in a future tax year. If the amount repaid was more than $3,000, it is either deducted as a miscellaneous deduction on Line 28, Schedule A, Form 1040 (and is not subject to the 2% of adjusted gross income limitation) or it is used to determine a credit that can be entered on Line 74, Form 1040, whichever method results in less tax.
To determine which methodology is most beneficial to the taxpayer, the user must calculate the return using both methods and then utilize the method that is most favorable to the taxpayer. First, figure the tax with a miscellaneous deduction on Line 28, Schedule A, Form 1040 for the amount repaid. This is done from the main menu of the 1040 return, then go to Itemized Deductions Menu Information, then Other Miscellaneous Deductions, then Repayment Under Claim of Right and enter the amount. Once the result of this methodology has been determined, remove the entry and calculate the return using the credit on Line 74 method.
Second, follow these steps to determine the credit to be entered on Line 74:
- Figure the tax for the current year without deducting any amount repaid.
- Refigure the tax for the earlier year (the year the income was included on the tax return) without including in income the amount that was repaid in the current year.
- Subtract the refigured tax under step (B) from the actual tax for the earlier year. The difference is the amount of the credit.
- Enter the amount of the credit on Line 74, Form 1040. This is done from the main menu of the 1040 return, then select Payments, Estimates Menu Information, then select IRC 1341 Repayment Amount and enter the difference. This will carry the credit amount to Line 74, Form 1040 and print the annotation "IRC Section 1341" in the column to the right of Line 74.
The Taxpayer should then use whichever method that provides the most favorable result.
NOTE: This is a guide to entering the Section 1341 Repayment/Claim of Right into the TaxSlayer Pro program. This is not intended as tax advice.