You get a great job – bonus is $120,000 but comes with a catch – if you leave the company in 2 years you have to pay it back. “Oh well – I better love this job,” you say. Well, a year later, prior to the expiration of this 2-year agreement, another job comes up offering a $200,000 bonus, better pay, equity comp, etc. Dream job situation. You shrug off and take the new job, repaying the bonus – but wait – you are repaying the $120,000 bonus in full, but you only saw $65,000 of it when you got it due to State and Federal tax! What happens with the state and federal taxes paid? Can you ever get them back?
Luckily, the IRS created what is known as the “Claim of Right Credit” or section 1341 credit. Essentially, this section of the IRS code allows you to take a credit on 2017 taxes for this bonus repayment for the bonus received, and taxed, in 2016 (or any other set of years). The calculation is as follows:
- Compute how much less tax you would have had to pay if you had not received this $120,000
- This difference in tax is your credit
- Use this credit on your tax return in the credits portion & indicate “Claim of Right”
- Keep adequate documentation of the bonus agreement, repayment request letter, etc., as you will need this in the case of an audit. These credits are often questioned by the IRS, particularly if they are for a larger amount
This is not accounting advice – this is for discussion only. Contact us anytime for help with section 1341.