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. Generally, 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. taxmap/pub17/p17-070.htm#en_us_publink1000172016
The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. You generally 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 on 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).taxmap/pub17/p17-070.htm#en_us_publink1000236658
If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefits
in chapter 11.
If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23.taxmap/pub17/p17-070.htm#en_us_publink1000172018
If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction
, earlier). 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.
Figure your tax for 2009 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. taxmap/pub17/p17-070.htm#en_us_publink1000172021
Figure your tax for 2009 claiming a credit for the repaid amount. Follow these steps.
- Figure your tax for 2009 without deducting the repaid amount.
- Refigure your tax from the earlier year without including in income the amount you repaid in 2009.
- 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 2009 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 70, and enter "I.R.C. 1341" in the column to the right of line 70.
An example of this computation can be found in Publication 525.