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IRS.gov Website
Publication 525
taxmap/pubs/p525-005.htm#en_us_publink1000229600

Repayments(p34)

rule
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.
taxmap/pubs/p525-005.htm#en_us_publink1000229601

Type of deduction.(p34)

rule
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).
If you repaid social security or equivalent railroad retirement benefits, see Publication 915.
taxmap/pubs/p525-005.htm#en_us_publink1000229602

Repayment of $3,000 or less.(p34)

rule
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/pubs/p525-005.htm#en_us_publink1000229603

Repayment over $3,000.(p34)

rule
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.
EIC
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.
taxmap/pubs/p525-005.htm#en_us_publink1000229604
Method 1.(p34)
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.
taxmap/pubs/p525-005.htm#en_us_publink1000229605
Method 2.(p34)
Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.
  1. Figure your tax for 2013 without deducting the repaid amount.
  2. Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
  3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
  4. 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.
taxmap/pubs/p525-005.htm#en_us_publink1000229606

Example.(p34)

For 2012 you filed a return and reported your income on the cash method. In 2013 you repaid $5,000 included in your 2012 income under a claim of right. Your filing status in 2013 and 2012 is single. Your income and tax for both years are as follows:
 2012
  With Income Without Income
Taxable Income $15,000 $10,000
Tax$ 1,819 $ 1,069
     
 2013
 Without DeductionWith Deduction
Taxable Income $49,950 $44,950
Tax$ 8,416$ 7,166
Your tax under method 1 is $7,166. Your tax under method 2 is $7,666, figured as follows:
Tax previously determined for 2012 $1,819
Less: Tax as refigured − 1,069
Decrease in 2012 tax $ 750
   
Regular tax liability for 2013$8,416
Less: Decrease in 2012 tax − 750
Refigured tax for 2013$7,666
You pay less tax using method 1, so you should take a deduction for the repayment in 2013.
taxmap/pubs/p525-005.htm#en_us_publink10002818

Repaid wages subject to social security and Medicare taxes.(p34)

rule
If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for refund using Form 843, Claim for Refund and Request for Abatement.
taxmap/pubs/p525-005.htm#en_us_publink10002819

Repaid wages subject to Additional Medicare Tax taxes.(p34)

rule
Employers cannot make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040X, Amended U.S. Individual Income Tax Return, for the prior year in which the wages or compensation were originally received. See the Instructions for Form 1040X.
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Repayment rules do not apply.(p34)

rule
This discussion does not apply to:
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Year of deduction (or credit).(p35)

rule
If you use the cash method, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. For example, if you use an accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues.