IRS Material: Rapid Income
Pub 17
Repayments If you had to repay an amount that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount repaid from your income in the year in which you repay it. 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. For instance, if you repay an amount that you previously reported as a capital gain, deduct the repayment as a capital loss. Repayment $3,000 or less. If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you reported it as wages, unemployment compensation, or other ordinary income, enter it on line 22 of Schedule A (Form 1040). If you reported it as a capital gain, deduct it on Schedule D (Form 1040). Repayment over $3,000. If the amount you repaid was more than $3,000, you can take a deduction for the amount repaid or you can take a credit against your tax. Follow the steps below and compare the results. Use the method that results in less tax. 1.Figure your tax for 1997 claiming a deduction for the repaid amount. 2.Figure your tax for 1997 without deducting the repaid amount. Then: a.Refigure your tax from the earlier year without including in income the amount you repaid in 1997. b.Subtract the tax in (a) from the tax shown on your return for the earlier year. c.Then subtract the answer in (b) from the tax for 1997 figured without the deduction. How you treat the repayment on your 1997 return depends on which answer above results in less tax. If the answer in Step (1) is less tax, deduct the amount repaid on the same form or schedule on which you previously reported it. For example, if you reported it as self-employment income, deduct it on Schedule C or Schedule C-EZ (Form 1040), or if you reported it as wages, deduct it on line 27 of Schedule A (Form 1040). If the answer in Step (2) is less tax, claim a credit on line 59 of Form 1040, and write "I.R.C. 1341" next to line 59. An example of this computation can be found in Publication 525.