Desktop: Section 1341 Repayment - Claim of Right / Social Security Repayment

How can I enter Section 1341 Repayment - Claim of Right/Social Security Repayment on the Desktop? 

A taxpayer may be required to pay back more than $3,000 which was added to their income in a previous year simply because in their imagination, they had a right that was unrestricted to it. As a result, a deduction of the repaid amount can be done by the taxpayer who can also, against their tax for  the year in which they made the repayment, take a credit. Subject to the limitations of the dollar, the taxpayer may do the following in the event of a repayment: 

• In the current year, they can reduce their income
• In the year that the repayment is made, make a deduction on the repaid amount that was repaid on Schedule A, Form 1040 as Miscellaneous deductions  
• For the year in which the repayment occurs, take refundable credit against the tax on Form 1040

Amendments cannot be made on the returns for the previous year. Check out “Repayments” in  Publication 17 - Your Federal Income Taxes. 

Depending on the type of income included in the prior year and the amount repaid, the repayment may be regarded as a miscellaneous itemized deduction, a reduction in income or a tax credit.

The amount repaid must be more than $3,000 for a taxpayer to be eligible to a Claim of Right provided in IRC Section 1341. The amount repaid may at time be minused in the very year of repayment and on the same schedule or form that it had been earlier included. As a result, in the current year, the taxpayer’s income will be effectively reduced by the same repayment amount. For instance, assuming that in the previous year it is regarded as self-employment income on Schedule C, then by reducing income in the very year of repayment the repayment becomes a deduction on Schedule C. 

You can’t reduce your current wages, nonbusiness income nor taxable unemployment using your previous wages, taxable unemployment compensation or other non-business ordinary income. Subject to 2% of adjusted gross income limitation, income reported as wages, nonbusiness income and taxable unemployment is deducted on Schedule. Check out “Repayments” in  Publication 17 - Your Federal Income Taxes.

Repayment amounts that are above the gross benefits that you get in the current year are the only ones considered when handling repayment of Railroad Retirement Benefits or Social Security Benefits: 

• SSA-1099, Box 3 - Shows Gross Benefits 
• SSA-1099, Box 4 - Shows the repayment total 
• SSA-1099, Box 5 - Shows net benefit received by the taxpayer. That is Box 4 minused from Box 3. 

The railroad retirement benefits and social security benefits that are taxable are determined using the amount in RRB-1099, Box 5 or SSS-1099, Box 5 respectively. Check out Publication 915 - Social Security and Equivalent Railroad Retirement Benefits.

When a taxpayer makes a repayment of benefits in the current year but had received overpayment of railroad retirement benefits or social security benefits, the difference between the repayment in RRB-1099, Box 4 (SSA-1099, Box 4) and the gross benefits in RRB-1099, Box 3 (SSA-1099, Box 3) will be seeked and recorded on Form RRB-1099, Box 5 (SSA-1099, Box 5). A negative amount is displayed in Form RRB-1099, Box 5 (SSA-1099, Box 5) when the gross benefits of the current year is less than the amount repaid. Benefits included in the gross income in the prior year are represented with this negative figure. 

The 2% of AGI limitation is applied to the negative amount in case that amount is less than $3,000. Such amounts are regarded as miscellaneous itemized deductions. A taxpayer can claim this on Schedule A, Form 1040. Check out Publication 915 - Social Security and Equivalent Railroad Retirement Benefits and “Repayment of Benefits” in Publication 17 - Your Federal Income Taxes.

Adding this deduction in your Taxx Savage Pro will require that you: 

• Go to the Federal Section of Form 1040
• Proceed to Itemized Deductions 
• Then Miscellaneous Deductions 
• And finally select Repayment under Claim of Right  

Negative amounts displayed in SSA-1099, Box 5 that are greater than $3,000 are eligible for Claim of Right under IRC Section 1341. A Claim of Right results when a taxpayer has to repay more than $3,000 of a year’s taxable income in a future tax year. A taxpayer, having paid more than $3,000 has a right to either deduct it as a miscellaneous deduction on Schedule A or use it to decide on a credit to be entered on Schedule 3. 

Prepare a taxpayer’s return in both methods to know which one will be more beneficial to them. For the amount repaid, note the tax that has a miscellaneous deduction on Schedule A. After determining the results of this method, remove the entry then calculate the return applying the credit on Schedule 3: 

1. Without deducting any repaid amount, determine the tax for the current year 
2. Without adding the repaid amount in the income in the current year, refigure the tax for the year in which the income was added to the tax return 
3. The difference between the actual tax for the prior year and the refigured tax in the second step is the credit amount. 
4. The credit amount is entered on Schedule 3 (Form 1040). You can make this entry in the Taxx Savage Pro by: 

• Going to the Federal Section of Form 1040 
• Selecting Payments and Estimates 
• Proceeding to the IRC 1341 Repayment Amount where you will enter the difference. The credit amount will be carried to the return together with the phrase “IRC Section 1341”. 

The aim is to apply the method which has the most favorable results.