It's been awhile since I've had to post here, but I read the digest every day. Have a client who received third party sick pay in 2004. He subsequently qualified for SSI payments (in 2005) and had to repay the sick pay he received and paid taxes on in 2004 (this is the short version; if I need to go into more detail, I will). Is there any fix for this situation? Thanks in advance.
Debbie
If he repaid more than $3,000, § 1341 gives him the option of deducting the repayment on Schedule A as a miscellaneous itemized deduction not subject to the 2% of AGI floor, OR claiming a refundable credit on Form 1040, line 70. The refundable credit usually is more beneficial. The credit is the difference between his actual 2004 tax liability and what his 2004 tax liability would have been without having included the sick pay. If he claims the credit he won't be able to e-file. I'm not sure if the Schedule A option precludes him from e-filing or not. If he repaid less than $3,000, the repayment is deductible only on Schedule A as a miscellaneous itemized deduction subject to the 2% of AGI floor, which almost means he's SOL. The deduction or credit is claimed in the year he repaid the income. You do not amend the 2004 return. IRS Publication 525 has a good explanation of Repayments on starting on page 33.
If is more than 3000 then sec 1341 credit otherwise is itemized deduction
If the sick pay he received was taxable in 2004 and the amount paid back was under $3000 and was originally reported as wages, deduct the repayment as a misc itemized deduction on schedule A (2% of AGI floor applies) in the year it was repaid.If the amount paid back was over $3000 you can use the misc ded method above or figure the amount of tax paid on the sick pay and claim a credit on line 70 of the 1040 on the year it was repaid.
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