Repayment of Claim of Right Income

Unless otherwise noted, the following information applies to individuals for tax year 2023. For information about another tax year, please review the Department’s Instructions and Bulletins for that year.

Claim of Right Deduction

You may be entitled to a deduction for the repayment of income included in federal adjusted gross income in an earlier tax year because it appeared that you had an unrestricted right to such income, to the extent the repayment is not deducted in arriving at federal adjusted gross income in 2023.  If the repayment is more than $3,000, the deduction is the amount of repayment.  Note: If you claimed itemized deductions on your 2023 federal income tax return, enter the amount claimed on federal Schedule A, Line 16.  If the repayment is $3,000 or less, refer to the worksheet below to calculate your deduction.

1. Enter the amount of claim of right income repaid during 2023 1. _________
2. Enter amount from D-400 Line 6, federal adjusted gross income 2. _________
3. Multiply Line 2 by 2% (0.02)(If negative, enter the number zero) 3. _________
4 Subtract Line 3 from Line 1.  Enter amount on Form D-400 Schedule A, Line 8 4. _________

Important: No deduction is allowed if the taxpayer calculates the federal income tax for the year of repayment under section 1341(a)(5) of the Code.

Claim of Right Credit

For federal income tax purposes, if the amount of repayment is more than $3,000, a taxpayer may be able to deduct the amount repaid in the year of repayment or elect to take a credit on the federal return.  (See Internal Revenue Service publication 525). 

If the taxpayer elects to take the federal tax credit instead of the tax deduction, the taxpayer is also considered to have made a payment of North Carolina income tax on the repayment.  The payment, which is applied against the tax liability for the year in which the repayment was made, is the amount by which the tax was increased in the earlier year because the income was included in gross income minus the amount the tax for the current year was decreased because the repayment was deductible.  Individuals may claim the payment on the individual income tax return by including the payment on the same line as S corporation payments.

Example: In 2018, a single taxpayer reported North Carolina taxable income of $69,500 on which $3,822 in tax was paid. The taxpayer’s only income was sales commissions. In 2019, it is determined that the commissions were erroneously computed for tax year 2018.  Accordingly, the taxpayer pays back $25,000 of the commissions. Federal adjusted gross income for 2019 without regard to a deduction for the repayment is $10,000.  For tax year 2019, the taxpayer claims a credit on the federal return for the amount of tax paid in 2018 on the income.

The tax payment to be claimed on the 2019 North Carolina return is determined as follows:

NC Tax on $69,500 $3,822
NC Tax on $44,500 ($69,500 - $25,000) $2,447
Additional tax paid on $25,000 $1,375
Less: Decrease in tax for deduction $ 0

Payment to be claimed on the 2019 North Carolina Return.  Enter amount on Form D-400, Line 21d, S Corporation.