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

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 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."

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 of Schedule 3 provided by the Internal Revenue Service (IRS). The taxpayer must check box d and write "I.R.C. 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.

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

Article Sources
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  1. Internal Revenue Service. "21.6.6 Specific Claims and Other Issues."

  2. Internal Revenue Service. "1040 and 1040-SR," Page 97.

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