Are you looking for different ways to reduce your individual income taxes for the current financial year?
The answer might be a yes because most taxpayers look for ways by which they can decrease the total taxation amount for any taxable year. However, it’s not as easy as it sounds.
With the US government and IRS establishing more and more rules and standards, the number of restrictions increases. And this has increased the taxation rates and limits the number of ways one can lower tax obligations.
However, Section 1341 plays an essential role in helping the taxpayers avoid being taxed on amounts of their personal income for a current year. Section 1341 or the Claim of Right is regarding a deduction in the annual income amount, which further reduces the tax liability.
This article will put forth several relevant facts concerning the Claim of Right relief and how it has become helpful to US taxpayers.
Claim of Right is a law which allows the taxpayers to redeem a certain percentage of their current year’s gross income based on the amount he had to repay in the previous year as a part of their tax filing requirement. A taxpayer is eligible for this benefit only if the amount he had to repay is equal to $3000 or more than this amount.
We can understand that our previous explanation is a bit vague, and hence, getting baffled is expected. This is why here we will explain how the Claim of Right relief works in the US.
To understand how this works, let us take an example.
You have been hired by a company ABC, on 2nd February 2019. Your salary is $10000 per month while you received a sign-on bonus of $4000. Now, the condition was that if you leave the company before one year, you will have to repay the sign-on bonus amount.
After working for several months, you resigned from the company on 1st January 2020. As your resigning date is within one year from your joining, you will have to repay the $4000 sign-on bonus amount to the company.
However, you left the company in a different year, i.e., in 2019, where your hiring year was 2018. So, for the year 2019, you will be taxed on the total earnings you had in 2018 and the amount you had returned. As it is more than $3000, the excess tax on the repaid amount of $4000 will be deducted from your 2019 income file return.
There is no such eligibility criterion for availing the benefit of Section 1341. The only restriction you will face is in the amount that has been repaid. If it is less than $3000, you won’t benefit from the benefit as a taxpayer in any state within US national boundaries. If the repayment amount is more than or equal to $3000, you can enjoy the deduction from the current year’s income tax return amount.