Client worked throughout 2019 in a salaried managerial position. In addition to her salary, she received a $2,000 bonus in 2019 in return for her agreement to stay on the job through 2020. Instead, in March 2020, she decided to retire and agreed to return the bonus. The company calculated the returned amount to be $1,847 - the $2,000 bonus less the Social Security/Medicare taxes withheld.
In January 2020 she received her regular W-2 for 2019, which correctly included the $2,000 bonus as part of taxable wages. In July 2020 she received a Corrected W-2c for 2019, which reduced her Social Security/Medicare wages by $2,000, reduced her Social Security/Medicare withholdings accordingly but did not reduce her Federal or State wages. Her Federal tax attributed to this $2,000 income is $556.
The employer subsequently included instructions that she should claim the $2,000 repayment on her 2020 tax return as an Itemized Deduction on Schedule A, Line 22. I checked Pub 525 and these instructions closely mirror the information found there, although ?Line 22? is incorrect and should probably now be ?Line 16.?
However, Pub 525 also includes the language, ?For tax years beginning after 2017, you can no longer claim any miscellaneous itemized deductions, so if the amount repaid was $3,000 or less, you aren?t able to deduct it from your income in the year you repaid it.?
Before reading Pub 525 and the employer-provided instructions, it was my intent to complete her 2019 Tax Return and simply enter ($2,000) on Line 8 of Schedule 1, annotated as ?Returned Bonus Payment.? That would conform to the information reported on the Corrected W-2c for 2019, even though the repayment was in 2020. Frankly, that still appears to be the fair and equitable reporting methodology.
In fact, since she continued to work through February 2020, I had expected the bonus repayment to be addressed in her 2020 W-2 which she will receive in January 2021.
Pub 525 also has language about claiming a tax credit the following year that appears to apply only to repayments of $3,000 or more. In addition, with a large capital gain from a house sale in 2019, her Federal marginal tax rate in 2019 is substantially greater than it will be in 2020. As it stands, she will pay taxes on this $2,000 bonus payment in 2019, with no way to undo that, even though the bonus has been returned and the employer has recognized that with a Corrected W-2c.
I understand cash accounting, but having a Corrected W-2 for one year with an entry on the tax return for the exact same adjustment on another year strikes me as incorrect.
- posted 1 week ago