Claim of right - how to take a deduction instead of a credit

Snoopy

My husband had to repay a retention bonus (about $7500) in 2025 that was paid in 2024. We are in a higher tax bracket in 2025 so I would like to deduct the repayment rather than request a credit. I can't figure out how to do that. There is only an option for a "Claim of Right Repayment Credit." Do I enter it under "Miscellaneous Deductions"?

MatthewD

Hello,

When you repay more than $3,000 that was included in income in a prior year, you generally have two options under IRC Section 1341 (Claim of Right):

1. Take a deduction in the year of repayment (2025 in your case)
2. Take a credit for the tax paid in the year repaid (2025)

You're correct that taking the deduction may be more beneficial since you're in a higher tax bracket in 2025.

To enter this as a deduction rather than a credit in FreeTaxUSA:

Go to Deductions/Credits > Other Itemized Deductions. Look for the dropdown menu and select "Claim Repayments".

Important note: The deduction can only be claimed if you itemize your deductions. If you're taking the standard deduction, you won't be able to use this method.

If the software is only showing the credit option and not giving you a choice, you may need to ensure you're itemizing your deductions first, as the deduction method requires itemizing.

Calculate your Claim of Right Credit and try both options separately to see which is most beneficial.