I have a client who had to repay $10,000 for disability pay that was reported on his 2021 tax return. The disability company received the funds on Jan 4, 2022, however the debit occurred out of the taxpayer's checking account on Dec 29, 2021. The disability company did not include the repayment when it did the 2021 W2 as they said they didn't have funds available to them until 2022. Would you take the claim of right credit on the 2021 tax return or on the 2022 tax return? I feel like it should be on the 2021 return, but wanted a second (or more) opinion on the matter. Thanks!
The 2021 return shows the full amount of disability pay, including the $10,000 paid back. The insurance company said they would not change the W2 amount because they did not have "use of the funds" until Jan 4, 2022. I think it has to be claim of right, because the W2 has the full amount - so maybe I should include it on 2022 tax return. I just dread getting an IRS letter about it and having to prove the payment and seeing the debit from the bank occurring in 2021. Thoughts?
I would file an amended 2021 return and a clean 2022 return.
Amend 2021 to take the claim of right credit? That was my thought too - or you mentioned this possibly not being a claim of right credit - do you see a different way to amend the 2021 return? (Again, there will be no corrected W2 from the insurance company.) I really appreciate your input!
Who was it that once said, "We tax income, not pieces of paper"? Anyway, if the W-2 is wrong, you need to tell IRS, not just accept what some clerk at an insurance company who has never taken a tax course tells you. I would have used a Form 4852, maybe, for 2021. For now, on an amended return, just decrease the wages by the amount of the returned funds, and explain it in a paragraph or two. And file on paper, which doesn't slow down the process more than three or four days.
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