Table of Contents

Section 1341 Credit: Definition, Purpose, and How It Works

By

澳洲幸运5开奖号码历史查询:Brian Beers

Updated August 07, 2024

Fact checked by

Timothy Li

Person using a calculator and holding a pen over tax papers — Constantine Johnny / Getty Images

What Is the Section 1341 Credit?

The Section 1341 credit is a federal tax credit available for U.S. taxpayers who reported 🦩income in a previous year but had to repay the income because it was paid in error.

The income that was repaid must amount to more than $3,000 in order for the taxpayer to take the deduction. Section 1341 allows taxpayers to claim a credit for taxes paid on wages not received from the previous year. It is also known as a "claim of right."

Key Takeaways

Section 1341 allows taxpayers to take a deduction to reflect a change in income from a previous year, without having to refile that year's taxes.
If you paid back income of $3,000 or more reported in a previous year, due to having been paid in error, you can deduct that amount in the current tax year.
Also known as a "claim of right," it is a credit for taxes paid on wages not ultimately received from the previous year.

How Does the Section 1341 Credit Work?

The Section 1341 credit is found on line 13 ("Other payments or refundable credits") of Schedule 3 of Form 1040 provided by the Internal Revenue Service (IRS). The taxpayer must choose b, "Credit for repayment of amounts included in income from earlier years," and fill in the amount on line 13b.

The credit is computed by refiguring the tax return from the previous year as if the wages had not been paid. Then the difference in tax is claimed as a credit on the current year's return. A taxpayer's only option, as of 2018 when the Tax Cuts and Jobs Act went into effect, is to claim the credit.

Other Considerations

If you use the cash method of accounting, you can take the credit for the tax year in which you actually make the repayment. When any other accounting method is used, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method, according to the IRS.

Important

The Section 1341 credit does not apply to deductions from bad debts, returns and allowances, or deductions for legal and other expenses of contesting the repayment.

What Is a Claim of Right Repayment?

A claim of right repayment is a deduction that you can take in the current tax year if you have to pay back income over $3,000 from a previous year that you thought was yours to keep. It is money that yꦍou reported and paid taxes on, unaware that you would have to pay that money back.

Can My Employer Make Me Pay Back Overpaid Wages?

Yes, most employers can legally recoup wages that t𒊎hey overpaid employees if thꦕey can prove the workers were overpaid. State and federal labor and employment laws give employers the right to garnish the future wages of an employee in cases of overpayment, but state laws vary, so check to see what the applicable law is in your state.

In Illinois, for example, an employer can make payroll deductions for overpayments if the employee has signed a written agreement voluntarily. Without such an agreement, the employer would need to take legal action to recover the overpayment. But in Texas, an employer can deduct an overpayment from an employee’s paycheck even without the employee’s consent.

If paying back the money will cause financial hardship, you can try working out a repaym♏ent plan with your employer.

Can My Former Employer Reclaim Overpaid Wages?

Yes, an employer can legally go after overpaid wages from an employee who has left the company. If the final wages haven't been paid, an employer may act quickly to reclaim the monies. But if a lot of time has passed, it may be difficult to find a former employee and a company may choose to right off at least some of the overpayment.

The Bottom Line

When the Tax Cuts and Jobs Act went into effect in 2018, miscellaneous itemized deductions could no longer be claimed on tax returns. As a result, if the claimed Section 1341 credit is for less than $3,000, you cannot deduct it in the year you repaid it, according to the IRS.

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