If you report income one year, and then need to pay back a portion of that income in a subsequent year, and the amount of the repayment exceeds $3,000, you can claim a tax break either of these ways:

1. Claim as a miscellaneous itemized deduction (not subject to the 2% AGI threshold), or

2. Claim a tax credit on your current return equal to the taxes you paid in the prior year on the portion of the income that was subsequently refunded.


The IRS actually does a decent job of explaining how to report a Repayment of Income. Check out this link to the section on repayments in IRS Publication 525, Taxable and Nontaxable Income, at:

http://www.irs.gov/publications/p525/ar02.html#en_US_publink100098573.

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