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What is the IRC 1341 repayment credit in layman's terms?

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May 31, 2019
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Best answer by GeoffreyG

Dear traceyrhering:

Internal Revenue Code (IRC) Section 1341 repayment credit is one of the two options that a taxpayer has (the other being a tax deduction) when the taxpayer is faced with a situation known as a Claim of Right.

A Claim of Right is, in simple layman's terms, basically the case where a taxpayer reported income as being taxable in one year, but then has to repay it back in a future tax year. An example of this would be where a retired person receives a pension payment during 2009, and then in 2013 receives a letter from the pension administrator informing them that an internal audit of the pension computer system revealed that the administrator made a mistake and overpaid benefits in 2009. As such, they now want the pension recipient to repay (the overpayment) by writing a check back to the pension plan. And as odd as that sounds, a variation of that very same thing happened to my own (retired) mother a few years ago.

But, the interesting tax "quirk" is that since the taxpayer already paid 2009 income taxes on the pension payment (which it turns out they weren't legally entitled to keep, after all), then there has to be a mechanism to make the taxpayer whole. Thus arises the concept of a Claim of Right, where the IRC 1341 is one of the two choices, as I've mentioned above.

Hopefully that helps you to understand the basics.

Now then, a taxpayer can either claim a deduction or a credit for this repayment, and here's how it works mechanically . . .

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction. The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repayment over $3,000. If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction ). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.

Method 1. Figure your tax for 2013 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2. Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.

Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2013 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, line 71.

If you choose a deduction, please enter it here:

Federal taxes - Deductions & credits - I'll choose what I work on - Other deductions and credits - Other deductible expense

Please answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Please enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

If you choose a credit (This can only be done in the Forms mode of the Desktop version of TurboTax), please enter it here:

FORMS - F1040 - Below line 70 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 71.

I've included a link to the IRS website for your reference:

http://www.irs.gov/publications/p525/ar02.html#en_US_2013_publink1000229600

Thanks for asking this important question, and good luck to you!

Regards

G

GeoffreyGAnswer

Employee

Dear traceyrhering:

Internal Revenue Code (IRC) Section 1341 repayment credit is one of the two options that a taxpayer has (the other being a tax deduction) when the taxpayer is faced with a situation known as a Claim of Right.

A Claim of Right is, in simple layman's terms, basically the case where a taxpayer reported income as being taxable in one year, but then has to repay it back in a future tax year. An example of this would be where a retired person receives a pension payment during 2009, and then in 2013 receives a letter from the pension administrator informing them that an internal audit of the pension computer system revealed that the administrator made a mistake and overpaid benefits in 2009. As such, they now want the pension recipient to repay (the overpayment) by writing a check back to the pension plan. And as odd as that sounds, a variation of that very same thing happened to my own (retired) mother a few years ago.

But, the interesting tax "quirk" is that since the taxpayer already paid 2009 income taxes on the pension payment (which it turns out they weren't legally entitled to keep, after all), then there has to be a mechanism to make the taxpayer whole. Thus arises the concept of a Claim of Right, where the IRC 1341 is one of the two choices, as I've mentioned above.

Hopefully that helps you to understand the basics.

Now then, a taxpayer can either claim a deduction or a credit for this repayment, and here's how it works mechanically . . .

Repayments

If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

Type of deduction. The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. In most cases, you deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

Repayment over $3,000. If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction ). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. Each instance of repayment is not considered separately.

Method 1. Figure your tax for 2013 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28.

Method 2. Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.

Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
Subtract the answer in (3) from the tax for 2013 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, line 71.

If you choose a deduction, please enter it here:

Federal taxes - Deductions & credits - I'll choose what I work on - Other deductions and credits - Other deductible expense

Please answer YES to "Did you have any other deductions that are not subject to the 2% limitation?"

Please enter the amount you repaid under, "Claim of Right Repayment (Only if over $3,000).

If you choose a credit (This can only be done in the Forms mode of the Desktop version of TurboTax), please enter it here:

FORMS - F1040 - Below line 70 is the Other Payments and Credits Smart worksheet.

Please enter the credit in line D.

This credit should show up on F1040, line 71.

I've included a link to the IRS website for your reference:

http://www.irs.gov/publications/p525/ar02.html#en_US_2013_publink1000229600

Thanks for asking this important question, and good luck to you!

Regards

T

traceyrheringAuthor

Employee

Thanks for the info!

L

LCM

My repayment is less than $3,000. Where do I input this amount? It was an overpayment of a bonus from the prior year that was repaid this year.

H

heybrian1

I would like to take my $11k+ repayment to my pension plan for tax year 2020 as a deduction for tax year 2021. However, I do not plan to itemize my return and plan to take the standard deduction for me and my wife. Can I still deduct the 11k repayment and combine the standard deduction of 26.5k? Or will I need to take the credit?

Hal_Al

Employee

Q. Can we deduct the 11k repayment if we use the standard deduction of 26.5k? Or will I need to take the credit?

A. You need to take the credit. The deduction is ONLY available as an itemized deduction.

F

frostedpandaz

What if the overpayment is not paid back in one lump sum?

I was over paid $3900 in wages in 2020. I paid it back with installments starting in 2021 but the whole amount wasn't completely paid back until Feb 2022. Can I claim a tax credit on my 2021 return? Or should I wait and claim the whole credit on the 2022 return next year?

LenaH

It depends. You can only use the "claim of right" Section 1341 credit if the amount is over $3,000 repaid per tax year. You cannot take the credit in 2022, if you repaid some of it in 2021. However, it sounds like you may have repaid more than $3,000 in 2021, which would qualify you to take the claim of right credit for the tax year 2021. If so, you cannot include the amount repaid in 2022.

The "claim of right" Section 1341 credit can be claimed as either an itemized (miscellaneous) deduction or as a credit. The deduction is the simpler way to claim your repayment, but a credit might save you more money.

For an explanation of the methods and how to calculate your amounts for the Section 1341 credit, please see Publication 525 and go to page 36. Figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

To enter as an itemized deduction, please follow the instructions below:

Open your return.
Click on Federal.
Click on Deductions and Credits.
Scroll down to Other Deductions and Credits and Click Start next to Other Deductible Expenses.
Answer Yes to the question Did you have any of these other expenses?
Enter the amount.

If you decide to claim your repayment of over $3000 as a credit, follow the information in Publication 525. This requires a special computation, and you would need to use a Desktop version of TurboTax and enter your credit using the Forms mode.

@frostedpandaz

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C

CuriousAD

How to apply these credits to a state return? E.g. I claimed overpayment in my federal return my state tax return (Pennsylvania) PA40 form through Turbotax desktop does not show this tax credit. How do I claim the overpayment of PA state taxes under 1341?