Unusual Income Tax Question - Any CPA's around?

[Chocaholic]

Will make a complex situation really brief.

What is tax treatment (Fed and State) when an employee refunds compensation ("clawback")?

This is the result of repaying "recoverable" compensation. Long story, but received a relocation payment that was recoverable if I left within 2 years...which I did. That payment was taxed/treated exactly the same as normal income. Note: in this case, only the "net" amount was recoverable. Wrote that check back in the spring.

And...may possibly be doing the same thing again. New employer provided a signing bonus that is fully recoverable (gross amount) if I leave within 1 year. Job is a horror story, so may be doing so. Hence my inquiry.

Any thoughts? Will obviously talk with our tax guy but interested in comments from the brain-trust...which is probably sharper than my tax guy!

[stomachmonkey]

Sounds like in the first case you are whole.

Meaning if the gross was recoverable you would be out the taxes paid but since it's net there is no loss to you therefore nothing to recoup.

Still something to look at if the relo money caused a significant increase in your marginal rate for that period. But I suspect if that were the case we are not talking a huge some of money.

In the second case did the signing bonus money come within the current filing year or was it last years? If within the current year not a big deal, it comes off your total taxable income when you file and should wash. If last years filing talk to a tax expert.

My general rule of thumb is to not deal with the IRS whenever possible. In other words is the amount of money worth the additional scrutiny your return may receive and the possibility they find something else, especially since you seem to question your tax guys expertise.

[ossiblue]

Originally Posted by Chocaholic

Will make a complex situation really brief.

What is tax treatment (Fed and State) when an employee refunds compensation?

This is the result of repaying "recoverable" compensation. Long story, but received a relocation payment that was recoverable if I left within 2 years...which I did. That payment was taxed/treated exactly the same as normal income. Note: in this case, only the "net" amount was recoverable. Wrote that check back in the spring.

And...may possibly be doing the same thing again. New employer provided a signing bonus that is fully recoverable (gross amount) if I leave within 1 year. Job is a horror story, so may be doing so. Hence my inquiry.

Any thoughts? Will obviously talk with our tax guy but interested in comments from the brain-trust...which is probably sharper than my tax guy!

Not a tax guy, but off the top of my head I'd say you can file an amended tax return for the year(s) in which your income will be reduced by the payment of compensation and, thus, you should have a refund on the tax paid. There is a statue of limitations of three years from the date filed to get an amended refund so be aware of the time limit. You would have to file the appropriate form and a new 1040, along with supporting documents. Your tax professional should know if this is the route to take and to help with the paperwork.

[mreid]

I just went through this very situation (clawback) in 2013.

My situation: paid 2012 performance bonus to executives on December 28 for tax purposes with clawback provision if executive leaves prior to March 15, 2013 (normal date of performance bonus payment). I left February 2013. To simplify, I was paid $100 gross, $60 after taxes. When I left the company asked for their $100 back. I should only pay the $60, they collect the tax paid back from the government, and I deduct $100 from W2 earnings. Crossing the tax years made this more confusing.

In your case, the government has taxed you on the gross amount. You need to deduct that amount from your W2 earnings and only pay the net back to the company. You need a tax expert to process this for you.

[Chocaholic]

Thanks guys. Really appreciate the insight.

Mark...looks like my situation is very similar, although if I pull the plug, am I liable for repayment of the gross amount since all would occur in the same year? I believe that's what was described earlier by SM. Or would I repay the "net" and instruct them to recoup taxes directly?

[mreid]

You should only repay the net. Mine was further complicated as I had 401k make up taken out.