A Claim of Right Repayment is a deduction that you may be able to take in the current tax year. If you reported income in a previous year but had to repay the income due to it being paid in error, you may be able to take a credit against the year it was repaid in.
This repayment must have been in excess of $3,000 to qualify for the deduction. This repayment may reduce your income for the current year, allow a refundable credit against the tax on Form 1040 for the year that repayment occurs, or allow the taxpayer to deduct the amount repaid as a miscellaneous deduction on Schedule A, Form 1040 in the year of repayment.
If you do have a Claim of Right Repayment you do not do an amended return for the prior year. Please see "Repayments" in Publication 525
The amount of the repayment and type of income that was included in the previous year will determine if the repayment is a reduction in income, a tax credit, or a miscellaneous itemized deduction.
What if I paid less than $3,000?
If the amount that you repaid was $3,000 or less, the Claim of Right under IRS Section 1341 will 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 525.
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 (must be more than $3,000).
How do I know what deduction to use?
To claim a credit for the repaid amount, you will need to figure your tax using both methods listed below and compare the results. Use the method that results in the least tax. See Publication 525 for complete information.
Method 1 - Figure your tax for the year of repayment claiming a deduction for the repaid amount.
Method 2 - Figure your tax for the year of repayment claiming a credit for the repaid amount.
- Step 1 - Figure your tax for the year of repayment without deducting the repaid amount.
- Step 2 - Refigure your tax from the earlier year without including in income the amount you repaid in the year of repayment.
- Step 3 - Subtract the tax in (2) from the tax shown on your return for the earlier year. This is
the credit. - Step 4 - Subtract the answer in (3) from the tax for the year of repayment figured without the
deduction (step 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 or 1040-SR (Federal Section > Payments & Estimates > IRC 1341 Repayment Amount)
Refer to Publication 525 for more information.