There may come a time when you receive income only to find out later that you have to repay it. This can happen for any number of reasons, and often the repayment is made in a later tax year. For example, when this happens, a deduction or credit for the repayment may be allowed in the year of repayment. The deduction is taken as an itemized deduction on Schedule A. A credit will result in a dollar-for-dollar reduction of your tax liability.
If the repayment was $3,000 or less, you are out of luck. Prior to 2018, this amount was generally deducted as a miscellaneous itemized deduction on Schedule A. However, recent tax law changes suspended all miscellaneous itemized deductions subject to 2% of your total adjusted gross income until after 2025.
If the repayment was more than $3,000, you have two choices. You can either deduct the total amount you repaid as an itemized deduction, or you may choose a tax credit for the year of repayment equal to the difference in the tax you paid on the income and the amount you would have paid if the income were not included on your tax return in the prior year.