My prior employer paid me a retention bonus in 2018. I left that company a year later, causing me to have to repay half of the bonus. My new company added an equivalent amount to my starting bonus. I would like to not treat this amount from my new company as income, since it was simply used to reimburse my prior employer. My new employer did report this amount as income on my W2 and is not willing to recharacterize it.

What do I need to do when filing my taxes to avoid paying tax on this money that was basically passed through? What IRS regs describe the rules?

  • What makes you think it will be possible for you to avoid having this taxed as income? It sounds like the company paid you money. The fact that you then used this money to fulfill another separate financial obligation doesn't make it not income to you, as far as I can see.
    – BrenBarn
    Feb 23 '20 at 1:06
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    @BrenBarn Do repaid bonuses count as income though? Surely if my employer pays me a $1000 bonus but I'm required to pay it back 6 months later that shouldnt count as income. Not sure how this is taxed if it occurs across more than one year.
    – Matt
    Feb 23 '20 at 2:22
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    Checkout the repayments section of form 525. You may be able to deduct it if it's over $3000 and you itemize. There's a comment about the money being unrestricted when you got it; don't know if that affects your situation or not, thus not an official answer from me.
    – mkennedy
    Feb 23 '20 at 16:28
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    You owed someone money. Then you took a job and they paid you some extra money to pay that debt. That's income, and I don't see why the fact that the person you owed the money to was your previous employer makes any difference. As others have noted, the money that you paid back may be tax-deductible. But that is not your new company's business.
    – Daniel
    Feb 24 '20 at 0:01
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    @Daniel Yes, that is what I assumed would be the case, which accomplishes what OP wants, but goes a slightly different route than was proposed.
    – Matt
    Feb 24 '20 at 0:06

You don't get to avoid paying taxes on this new income. But, you may be eligible to deduct the repayment to your previous employer. Publication 525 and its section on Repayments may provide you with some guidance. Consult a tax advisor.

  • Thanks much, Todd. See my comment above. Any help interpreting the "claim of right" rules?
    – user7392
    Feb 24 '20 at 14:34
  • It applies to the repayment you made of the first bonus you received. Stop framing your question as if the bonus you received from your second employer has anything to do with your question; it does not. Again, consult a tax advisor or give the IRS a call.
    – Todd
    Feb 25 '20 at 0:53
  • Thanks for your opinion, Todd. But I think my view of the connection is fair. The money from company B was offered solely to reimburse company A. One option was B paying it directly to A, rather than through me. There was a guarantee by B that there would be no tax consequences. B has the option to frame it as something other than W2 income (I won't say what). It's only in the narrow context of pub 525 that they are unrelated, but in the context of the situation as a whole they are very related.
    – user7392
    Feb 26 '20 at 4:43
  • FYI, I did hire a tax accountant and also consulted the chief legal counsel at company A, and both concurred with my interpretation entirely.
    – user7392
    Sep 6 '20 at 4:04
  • @user7392 - What method did they use to effect that interpretation?
    – Todd
    Sep 20 '20 at 18:21

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