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Author: Airmom One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: Sign on bonus payback Date: 3/5/1999 3:07 PM
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I joined a new company in October 1998. I was paid a sign on bonus of $7k.

However, the job wasn't a good fit. I quit the job in February 1999. I paid the company the sign on bonus back, per our contract.

It looks like I must report the 7k as income on the 1998 tax return. But what about the repayment? Do I get some kind of credit or deduction for it on the 1999 tax return?

Thanks
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11781 of 121599
Subject: Re: Sign on bonus payback Date: 3/9/1999 7:53 PM
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[[I joined a new company in October 1998. I was paid a sign on bonus of $7k.

However, the job wasn't a good fit. I quit the job in February 1999. I paid the
company the sign on bonus back, per our contract.

It looks like I must report the 7k as income on the 1998 tax return. But what
about the repayment? Do I get some kind of credit or deduction for it on the
1999 tax return?]]

You sure do...Here is an excerpt from IRS Publication 525 that may be of interest to you...

"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.

If you repaid social security or equivalent railroad retirement benefits, get Publication 915. If you repaid other railroad retirement benefits, get Publication 575.

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 either take a deduction for the amount repaid (Method 1) or you can take a credit against your tax (Method 2). Figure your tax under both methods and use the method that results in less tax.

Method 1. Figure your tax for 1998 claiming a deduction for the repaid amount.
Method 2. Follow these steps.
1) Figure your tax for 1998 without deducting the repaid amount.
2) Refigure your tax from the earlier year without including in income the amount you repaid in 1998.
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 1998 figured without the deduction (step 1).

If the amount from Method 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 as a business deduction on Schedule C or Schedule C-EZ (Form 1040). If you reported it as wages, deduct it as an individual deduction on line 27 of Schedule A (Form 1040).

If using Method 2 results in less tax, claim the credit on line 63 of Form 1040, and write "I.R.C. 1341" next to line 63.

Example. For 1997 you filed a return and reported your income on the cash method. In 1998 you repaid $5,000 included in your 1997 gross income under a claim of right. Your filing status in 1998 and 1997 is single. Your income and tax for both years are as follows:
1997 1997
With Income Without Income
Taxable Income $15,000 $10,000
Tax Liability $ 2,254 $ 1,504

1998 1998
Without Deduction With Deduction
Taxable Income $49,950 $44,950
Tax Liability $10,698 $ 9,298
Your tax under method (1) is $9,298. Your tax under method (2)is $9,948, figured as follows:
Tax previously determined for 1997 $2,254
Less: Tax as refigured - 1,504
Decrease in 1997 tax $750
Regular tax liability for 1998 $10,698
Less: Decrease in 1997 tax - 750
Refigured tax for 1998 $9,948

Because you pay less tax under method (1), you should take adeduction for the repayment in 1998.
Repayment does not apply. This discussion does not apply to:

1) Deductions for bad debts,
2) Deductions from sales to customers, such as returns and allowances, and similar items, or
3) Deductions for legal and other expenses of contesting the repayment.

Year payment deducted. If you use the cash method, you can take the deduction for the tax year in which you actually make the repayment. If you use any other accounting method, you can deduct the repayment 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 in the tax year in which the obligation for the repayment accrues."

Hopefully this should help you out.

TMF Taxes
Roy

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Author: Airmom One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11827 of 121599
Subject: Re: Sign on bonus payback Date: 3/10/1999 9:35 AM
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Thank you for the answer. It's very detailed but clear. I appreciate all the work you performed to get such a thorough answer to me.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12069 of 121599
Subject: Re: Sign on bonus payback Date: 3/12/1999 10:48 PM
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[[ Thank you for the answer. It's very detailed but clear. I appreciate all the work
you performed to get such a thorough answer to me.]]

Sorry to be so detailed, but I wanted to give you enough to work with. It's a complicated issue, so I wanted to give you something that would be a complete answer. I'm glad it was at least somewhat clear.

And...thanks for the kind words.

TMF Taxes
Roy

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