Question: Sam received a $15,000 signing bonus in 2023 with an agreement to work for two years. She only worked nine months for the employer and then quit her job. The employer sent a notice stating she must repay $9,000 by end-of-year and adjustments for the repaid bonus would be included on her Form W-2, Wage and Tax Statement. Sam was not able to repay the funds until early 2024. What is the proper way to account for the repayment of income received in one year that was repaid in a later year?
Answer: Since the funds were received in 2023 and repaid in 2024, Sam would use the claim of right adjustment under §1341. In that case, an adjustment is made on the 2024 return. Since the repayment amount is greater than $3,000, Sam can deduct the amount repaid on Schedule A, Itemized Deductions, Line 16. She could instead take a credit (payment) reported on Schedule 3, Additional Credits and Payments, Line 13b. The credit is the difference between the 2023 tax as originally reported and the taxes calculated in 2023 without including the amount repaid. Ideally, run the calculations for both options (a deduction on Schedule A versus a payment on Schedule 3) and use the method that results in the larger tax benefit. If Sam wants a refund of the Social Security and Medicare taxes, the first step is to see if the employer will refund them. If not, she would use Form 843, Claim for Refund and Request for Abatement.
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