If you repaid income that was reported and taxed in a prior year because you reasonably believed you had an unrestricted right to the income when it was received, you may qualify for a California Claim of Right deduction or credit under IRC Section 1341. Depending on the repayment amount and your circumstances, claiming a deduction or a credit may reduce your California tax liability.
What Qualifies for a Claim of Right?
You may qualify if:
- You repaid income that was included in a prior year's income because you originally believed you had an unrestricted right to the funds.
- The income was previously taxed by California. If the repayment relates to income that was not taxed by California, no deduction or credit is allowed.
Deduction vs. Credit
Claim of Right Credit
If the amount repaid is more than $3,000, you may be able to claim a California Claim of Right credit under IRC Section 1341 if it results in a lower California tax than claiming a deduction.
Program Pathway:
- State
- Edit California State Return (3 dots and select Edit)
- Payments
- Claim of Right (IRC 1341)
Claim of Right Deduction
You may be able to claim a deduction for the repayment amount. If the repayment is $3,000 or less, the deduction is generally subject to the 2% AGI limitation for California miscellaneous itemized deductions.
Program Pathway:
- State
- Edit California State Return (3 dots and select Edit)
- Itemized Deductions
- Other Adjustments to California Itemized Deductions
- Enter the description and deduction amount
Additional Information
- If the amount repaid was not taxed by California, no Claim of Right deduction or credit is allowed.
- Repayments of Social Security benefits generally do not qualify because Social Security benefits are not taxable by California.
- For repayments greater than $3,000, California allows taxpayers to determine whether claiming a deduction or a credit results in the lower tax liability.