Did You Repay Income You Originally
Reported on a Tax Return?
You May be Allowed
a Tax Deduction
Often taxpayers properly include wages, disability
benefits, or other income on their tax return only to find out later that
they did not have an unrestricted right to the income. If this happens to
you, you’ll have to repay the income, usually in a later year. The IRS
will allow a deduction or tax credit, depending on how much you paid back
within the tax year.
If the repayment was $3,000 or less, the amount is generally deducted as a
miscellaneous itemized deduction on Schedule A, Itemized Deductions. The
total of all miscellaneous itemized deductions must exceed 2% of your
total adjusted gross income before any tax benefit is derived.
If the repayment was more than $3,000, you have two choices. You can
either deduct the total amount you repaid as a miscellaneous itemized
deduction not subject to 2%, or you may choose a tax credit for the year
of repayment equal to the difference in the tax you paid on the income and
the amount you would have paid if the income was not included on your tax
return in the prior year.