You may be able to claim a deduction or credit on your return if you had to repay more than $3,000 that was included in your income in an earlier year. When a repayment is required, you may be able to:
- reduce your income in the current year by the repayment amount
- deduct the amount repaid as a miscellaneous deduction on Schedule A
- claim a refundable credit on form 1040 in the year the repayment was made
Can I amend the prior year return?
The prior year return cannot be amended. See: "Repayments" in Publication 17 - Your Federal Income Taxes.
What if it was repaid in the same tax year?
If the amount was repaid in the same tax year, reduce the income in the current year by the amount repaid.
How do I claim a deduction for the repayment?
Whether you can reduce the income in the earlier year or claim a credit depends on the type of income reported on the return in the earlier year.
- If the amount you had to repay was reported as wages, unemployment compensation or other nonbusiness income, you will deduct it as a Schedule A deduction.
- If the amount repaid was self-employment income, deduct the repayment as an expense on the Schedule C or F form.
- If the amount repaid was from a capital gain, report the repayment as a loss
How do I report the Schedule A Deduction?
To report the repayment as an itemized deduction:
- Federal Section
- Deductions
- Itemized Deductions
- Miscellaneous Deductions
- Repayment under claim of right (if greater than $3000)
How do I claim a credit for the repayment?
To claim a credit for the repaid amount instead, you will need to figure your tax using both methods and compare the results. Use the method that results in the least tax. See Publication 17and Publication 525 for additional information.
Method 1 - Figure your tax claiming a deduction for the repaid amount as a Schedule A Deduction (above).
Method 2 - Figure your tax claiming a credit for the repaid amount (below):
- Figure your tax without the Schedule A deduction.
- Refigure your tax on the prior year return reducing the income by the amount repaid in the current year
- Compare the amount of tax in step 2 against the tax on the return filed for the previous year. The difference is the amount you may claim as a credit on the current year return.
Where do I enter the credit for the repayment?
If you are taking the credit on your return, visit the Payments and Estimates section of the federal return (IRC 1341 Repayment Amount). Be sure to claim only the amount you are able to based on the worksheet in Publication 525.
What about amounts less than $3,000?
Beginning in 2018 with the Tax Cuts And Jobs Act, miscellaneous deductions are no longer permitted. So if the amount repaid was $3,000 or less, you are not able to deduct it from your income in the year it was repaid.