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legaleagle, Attorney
Category: Tax
Satisfied Customers: 13441
Experience:  Completed Fed Income Tax in law school, 10 years preparing personally tax returns
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Is a retention bonus tax refundable?

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I received a $200,000 retention bonus from an employer in Sept 2010. It was tied into a 3 year promissory note where the amount due back to my employer was reduced by 1/3 on each anniversary of the note and at year 3 it was forgiven. I left this company prior to the first anniversary and had to pay back 100% of the amount I received. However, all taxes (state and federal, this is in California) were taken out of the $200,000 when I received it. This was approx $68k. Since I had to pay back all of the money, I assume that I am entitled to get back most if not all of the taxes I paid. Is this correct?

Yes, if you report that you repaid the money and show that the $68K was paid in taxes, on your tax return you will get to show that you have paid $68K in taxes and based on all your other deductions and credits, you should get back the entire $68K if you usually get a return.

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Customer: replied 5 years ago.

How do I go about this on my tax return? Do I amend my 2010 tax return and reduce my amount of compensation by $200,000?

Or do I reflect this on my current 2011 return? If so, how do I go about that?

Since the repayment occurred in 2011 you would include it in your 2011 taxes. Have some proof of repayment in case the IRS asks any questions.

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. , 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 D (Form 1040). If you reported it as wages, unemployment compensation, or other non-business income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).Repayment over $3,000. 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 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 choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.

Customer: replied 5 years ago.

This was included as "wages" so I am deducting as a misc itemized deduction on Schedule A, (Form 1040).

My question is this - the bonus was $200,000. I was paid $200,000 which after taxes was $126,640. I paid $126,640 back to my employer (and I have both the signed promissory note reflecting the terms of the deal, etc along with a copy of the cashier’s check which I repaid them with so I am fine on documenting this to the IRS if they ask).

When I enter the amount of repayment do I use $126,640 (what I actually repaid) or do I use $200,000 (amount I received but was taxed on)?

You only enter the amount of the actual repayment.
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