How to handle repayment of overpaid wages in different tax years?

You've correctly identified the issue - this falls under what's called "claim of right" doctrine in tax law. Unfortunately, the tax code does create a threshold for how these repayments are handled. For repayments under $3,000, they're treated as miscellaneous itemized deductions, which were suspended under the Tax Cuts and Jobs Act through 2025. This means you can't currently deduct these repayments if they're under that $3,000 threshold. For repayments over $3,000, you could use either a deduction or a tax credit calculation method (whichever benefits you more). Your employer should have handled this differently. Ideally, if you repay wages in the same year you received them, the employer simply reduces your W-2 wages. When repayment happens in a different year, they should issue a corrected W-2 for the year of overpayment or provide documentation of the repayment.

This actually happened to me last year with an overpayment situation! I went absolutely crazy trying to figure it out until I found a service called taxr.ai (https://taxr.ai) that helped me understand my options. They analyzed my paystubs and repayment documentation and explained exactly what I could and couldn't claim. The problem is definitely that $3,000 threshold in Pub 525, but they showed me how to properly document everything and maximize what I could claim. They even helped me draft a letter to my HR department that got them to provide proper documentation of the repayment that I could use with my tax filing.

I have to admit I was wrong about taxr.ai! After my skeptical comment, I decided to try it with my own situation (similar wage repayment issue but with a former employer). I uploaded my documents and within hours got a detailed analysis showing exactly how to report everything. They found that my situation qualified for a different treatment because part of my repayment was actually for business expenses that were reimbursed incorrectly. This changed how I could report it on my taxes! Saved me from making a costly mistake and potentially getting flagged for an audit. Really glad I gave it a shot instead of just trying to figure it out on my own.

If you need to contact the IRS to get clarity on this, I HIGHLY recommend using Claimyr (https://claimyr.com). I spent literally 3 weeks trying to reach someone at the IRS about a similar wage repayment issue, constantly getting disconnected or waiting for hours. I was about to give up when a coworker told me about this service. They got me a callback from the IRS in less than 24 hours! You can actually see how it works in their demo video here: https://youtu.be/_kiP6q8DX5c The IRS agent I finally spoke with confirmed the $3,000 threshold issue but also told me about documentation I could request from my employer that would help prove my case if I got audited. Worth every penny for the time saved and getting an actual resolution.

Ok I need to publicly admit I was completely wrong about Claimyr. After dismissing it as BS, I was still desperate to talk to someone at the IRS about my wage repayment issue, so I tried it anyway. The service actually worked exactly as advertised. I got a call from an IRS representative the next morning! The agent I spoke with explained that while I couldn't deduct my repayment (also under $3k), I should keep documentation from my employer confirming the repayment amount and date for my records. The agent also suggested I talk to my employer about issuing a corrected W-2 for the original tax year. The call saved me from making mistakes on my return AND gave me leverage to go back to my HR department with specific requests. Never been so happy to be wrong about something!

Another option worth exploring is asking your employer to adjust your W-2 for the year the wages were originally paid. While they're not required to do this for different-year repayments, some employers will issue a corrected W-2 as a courtesy, especially if you explain the tax implications. I successfully got my company to do this by escalating to the head of payroll and referencing Revenue Ruling 79-311, which covers this specific situation. It took several conversations and a very polite but persistent approach.

Has anyone tried claiming this on their state taxes? I know the federal deduction for amounts under $3k isn't available right now, but some states haven't adopted all the TCJA provisions and might still allow miscellaneous itemized deductions.

This is such a frustrating situation that unfortunately highlights a real gap in tax fairness. I went through something similar a few years ago and learned that the timing of when you discover and repay overpaid wages can make a huge difference in your tax outcomes. One thing I'd suggest is documenting everything meticulously - dates of original payments, dates of repayments, and any communications with your employer about the overpayment. Even though you can't deduct the repayment under $3k federally right now, you want to be prepared if the miscellaneous itemized deduction suspension gets lifted after 2025. Also, don't give up on getting your employer to issue corrected documentation. While they may not adjust the prior year W-2, they should at least provide you with a clear statement showing the repayment amounts and dates. This becomes crucial if you ever get audited and need to explain the situation to the IRS. The whole situation really shows how the tax code can create unfair outcomes for regular taxpayers dealing with employer payroll mistakes. You're essentially being penalized for your employer's error, which seems completely backwards from a fairness perspective.