Every once in a while, a military member receives a bonus and then has to repay it, usually because they didn’t fulfill the terms of the bonus agreement. And because taxes have already been taken out of that bonus payment, things can get a bit messy.
Now, if the payment and the repayment occur in the same tax year, you should be good to go. As long as you ensure that your W-2 reflects the right amount of income and taxes withheld, the taxes that were withheld from the bonus payment will be factored into your overall return and will either result in a larger refund or a smaller amount owed.
However, if the bonus payment and the repayment occur in different years, things aren’t so simple. A reader wrote in with this question:
“The California National Guard needed qualified MPs for a deployment to Iraq in 2009 and gave a $10,000 bonus for qualified officers to leave the Reserves and join the CA ARNG. I served two years in Iraq and then came home in 2011 to find out the CA ARNG did not have the correct paperwork and I was required to pay back the bonus. Here is the rub….They took $3000 dollars out for taxes but I had to pay back the full $10,000. How do I get that $3,000 dollars back? The CA ARNG says it is not their problem, I have to work with the IRS. This does not sit well with me as THEY took out that money! Your thoughts?”
Here’s my reply:
“When the CA ARNG withheld the $3,000 from your bonus, they submitted it to the IRS. Both the bonus and the withheld taxes were reported to you on your W-2 for the year in which the bonus was paid. The bonus amount and the withholding amount were reflected on your federal income tax return for that year.
Because you have repaid that bonus, you need to note this on your federal tax return for the year in which the repayment occurred. Due to the amount, you have a slightly complicated situation. It is explained on page 34 of IRS Publication 525. This is tricky stuff, and if you are not comfortable with it, you should have a tax professional help you with the process.”
In a perfect world, I would just cut and paste the relevant section of IRS Publication 525. However, this is the IRS we’re talking about. There are all sorts of different rules depending on the amount, the type of income it was originally reported as being, and the circumstances of the repayment. So, as I said to my reader: if you don’t understand , get help!
If you have experience with this, or questions, please ask in the comments!