What Is the Section 1341 Credit?

The Section 1341 Credit is a tax credit available for taxpayers who reported income in a previous year but had to repay the income because it was paid in error in the first place.

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."

In years past, any repaid income of less than $3,000 could be included as a miscellaneous itemized deduction, but as of 2017, that is no longer an option; currently, a taxpayer must have paid back income of more than $3,000 to qualify for the deduction.

On occasion, taxpayers may realize a mistake was made in filling out their tax forms or that their circumstances have changed after submitting their returns. As a result, Section 1341 credit allows taxpayers to avoid filing an amended return for the previous tax year.

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 16 of Form 1040 provided by the Internal Revenue Service (IRS). The taxpayer must write "IRC 1341" in the blank space next to the box.

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. The taxpayer's only option, as of 2018, is to claim the credit.

In years past, up through the end of 2017, taxpayers could choose to either claim the credit, or if the amount repaid was less than $3,000, deduct the repayment as a miscellaneous itemized deduction, choosing whichever option provided them the greater benefit. However, with the elimination of miscellaneous itemized deductions, that is no longer possible.

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. It also does not apply to deductions from bad debts, or returns and allowances.