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Example scenario:

I accept a job that pays me a signing bonus. I accept the job, and I receive my signing bonus, which is taxed appropriately. However, there is a clause in my agreement that states that if I leave my place of employment before a certain amount of time, I have to repay the signing bonus to the company.

I leave that position for another position that I perceive as better, and I am forced to return the money to my previous employer, for the full amount, without tax.

I no longer have the initial income, and I'm actually now out MORE money than I initially made, since I never go the amount that the taxes took in the first place. How is this resolved at the federal income tax level?

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I did a little bit of googling and found the answer to my own question. Not sure why I was too lazy to do that initially.

Anyway, it depends on when you have to repay the bonus. If you accept the job, then have to pay back the bonus in the same tax year, then you just repay the amount you received after taxes. IE, if my bonus was $1000 and I only received $800 of it, I only owe my company $800 back. The company is responsible for getting the taxes back.

However, it gets weird if and when I accepted the job in one year, but had to repay the money the next year. Essentially, I can treat $1000 that I had to send back as a tax credit or an itemized deductible. Unfortunately, I can't get my income tax money back, despite never receiving the money. That's just the fed's now.

Source: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/i-was-paid-a-signing-bonus-in-2014-and-repaid-it-in-2015-how-does-this-effect-my-2014-tax-year/00/31647

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    From the link, the tax credit case only applies when the amount is $3000 or more, so in the $1000 case you can't use it anyway. But if you can take the tax credit, doesn't that mean you do get the tax back as long as you would otherwise owe that much in tax in the next year, as you can use it to reduce the next year's tax bill? Or is there something about the way tax credits work in the US that I'm missing?
    – GS - Apologise to Monica ♦
    Dec 5, 2019 at 18:54
  • Rereading, I think you have a point, here.
    – NegativeFriction
    Dec 5, 2019 at 18:55
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    You misunderstand: You can claim the amount of the repaid bonus as a deduction (B= bonus, your taxable income (X) in the year repaid becomes X-B). If your marginal tax bracket is the same, then effectively you get the income tax back. Or you calculate how much income tax you paid on that bonus (note- this might not be the same as the amount that was withheld by the employer) and claim that as a tax credit. What you cannot get back is the FICA (aka "Social Security Tax") you paid. If your income in that year was above the max even without the bonus, then it effectively does not matter.
    – Damila
    Dec 5, 2019 at 20:37

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