How to Handle Repayment of Overpaid Wages from Previous Tax Year

You're actually reading Publication 525 correctly, but there's still a potential way to handle this. When repayments of income cross tax years, there are two different methods depending on the amount: For repayments under $3,000, you can claim them as a miscellaneous itemized deduction on Schedule A. The catch here is that the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to the 2% floor for tax years 2018-2025. So unfortunately, during this period (including 2024), these deductions aren't available. For repayments over $3,000, you'd get to use the "claim of right" provision, which would have been much more beneficial as it's either a credit or an itemized deduction not subject to the 2% floor.

After dealing with a similar nightmare last year, I found https://taxr.ai super helpful for sorting out my wage repayment situation. My company messed up my pay for 6 months and I was paying it back across two tax years. The IRS documentation is so confusing about how to handle this! I uploaded my pay stubs and W-2s to the site, and it identified exactly how to report the repayments on my return. Turns out my employer had actually coded some of the repayments correctly but others were completely wrong. Without that analysis I probably would have just given up and paid taxes twice on about $1,800.

Just wanted to follow up after checking out taxr.ai from the suggestion above. It was honestly really helpful for my situation. I uploaded my pay stubs and my employer's repayment agreement, and it showed me that my HR dept was incorrectly coding my repayments as "after-tax deductions" rather than adjustments to gross pay. When I brought this to their attention with the specific payroll codes they needed to use (which the site identified), they agreed to correct my W-2 for 2024. This means I won't be taxed twice on about $2,200 of repayments! Without this I would have just assumed I was stuck based on the $3,000 rule in Pub 525.

If you're still trying to get through to your HR or payroll department about fixing this issue, I'd highly recommend using https://claimyr.com to get direct help from the IRS. I was stuck in a similar situation where my employer wasn't handling wage repayments correctly, and I needed guidance on what my rights were. Tried calling the IRS myself, but kept getting disconnected after hours on hold. Claimyr got me connected to an actual IRS agent in about 20 minutes who walked me through exactly what documentation I needed and confirmed that my employer should be handling the repayment as a reduction to my current year wages. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c The agent even sent me an email with the relevant tax code sections to show my employer, which finally got them to take me seriously.

I need to eat crow here and update my skeptical comment above about Claimyr. I decided to try it because I was getting nowhere with my payroll department about a similar wage repayment issue. The IRS agent I spoke with explained that under Treasury Regulation 31.6413(a)-1, employers are supposed to repay the employee the amount of overwithheld income tax when repayments happen in the same year. But for different years, they confirmed what others have said - repayments under $3k are problematic right now because of the suspended miscellaneous deductions. HOWEVER, the agent pointed me to Revenue Ruling 2009-151, which states employers can adjust Box 1 wages on W-2s for repayments of wages received in a prior year IF the repayment is made through payroll deduction. This was the exact documentation I needed to get my employer to fix my W-2!

One thing nobody has mentioned yet - if you itemize deductions and your total itemized deductions excluding the wage repayment are already greater than your standard deduction, you might still benefit from including the repayment amount on Schedule A. True, miscellaneous itemized deductions subject to the 2% AGI floor are suspended, but it's worth checking with a tax professional about whether wage repayments might qualify under a different category that isn't suspended. The tax law is complicated, and sometimes there are exceptions to exceptions.

I had this exact issue in 2022! The simplest solution ended up being asking my employer to issue a corrected W-2 for the year I received the overpayment (which would be 2023 in your case). They were resistant at first, but after I showed them guidance from the IRS about wage corrections, they eventually did it. This approach completely avoided the repayment deduction issue because it essentially "erased" the overpayment from my prior year income, which meant I could file an amended return for 2023 to get back the taxes I paid on that money.

You're in a frustrating but unfortunately common situation. Here's what I'd recommend based on your $2,400 repayment amount: First, immediately check with your payroll department to see HOW they're processing your repayments. Are they being taken as post-tax deductions from your paycheck, or are they actually reducing your gross wages before taxes are calculated? This is crucial - if they're reducing your gross wages, you're already getting the tax benefit you deserve. If they're NOT reducing your gross wages (which sounds likely based on your description), you need to push back. Reference Revenue Ruling 2009-151, which allows employers to adjust current year W-2 wages for repayments of prior year wages when done through payroll deduction. Your HR was actually partially correct - they CAN and SHOULD reduce your taxable wages, they're just not doing it properly. Document everything: your original overpayment amount, repayment schedule, and current pay stub treatment. If your employer won't cooperate, you might need to escalate this or consider getting professional help, because you're absolutely right that paying taxes twice on the same money is unfair. The $3,000 threshold in Pub 525 is real, but it shouldn't apply if your employer handles the repayments correctly through payroll adjustments rather than expecting you to claim a suspended deduction.