The Internal Revenue Service calls it “wrongful incarceration,” and the government may owe you a refund if you ever – any time in the past – paid federal income tax on payments that came out of it.
Until Dec. 19, anyone who had a conviction reversed and won damages is entitled to a complete refund of federal income taxes they paid on those awards. They could be from subsequent lawsuits, restitution or many other financial payments, as long as they relate to the “incarceration.”
Until last year, the people who had gotten out of jail still had to pay federal income taxes on those damages. But Congress ended that obligation last December.
Since then, IRS has allowed a wide-open window for claiming refunds. In short it hasn’t mattered when the taxes were paid in the past. But the year-long window closes on Dec. 19.
After then, people affected still will be able to claim refunds, but the normal deadlines will apply. (Normally, refund claims for tax years 2012 and earlier would not be allowed.)
There are some details to know. For example, people claiming must have actually been convicted of a crime and then released, whether by court order, new trial or even by a pardon from a governor or the President.
The tax break might be small comfort for spending time in the slammer. But, this exclusion for wrongful incarceration also could mean a hefty chunk of refunds plus interest for those who paid taxes on this very unusual income!
Contact us at EricJohn Ltd. for this and other little-known niches of codes involving federal and state tax return.