Assuming the unemployment compensation was taxed...
You will need to amend your 2015 income tax return. You'll also need to amend your 2016 income tax return.
You will file for a refund under a concept called "claim of rights."
If during the year you repaid less than $3,000 you deduct the repayment as a miscellaneous itemized deduction on Schedule A (Form 1040) on your 2015 income tax return. Since you paid more that $3,000 in both years you might think this doesn't apply to you, but it might, so read on.
If during the year you repaid more than $3,000 you can also deduct this on Schedule A but, alternatively, you can take a tax credit for the year of repayment, whichever provides the most benefit.
In order to claim a credit you'd need to be able to re-figure your 2014 income taxes without those overpayments payment included. You then claim the difference between what you actually paid in taxes that year and what you should have paid in taxes without the overpayments, and claim that amount as an income tax credits on your 2015 and 2016 Forms 1040.
You'd have to do this in two stages: 1st with the "just over $3,000" paid in 2015 omitted as income in 2014, noting how your taxes changed, and
claiming the differential as a credit in 2015. And then again, omitting the remaining "$6-7000 this year" amount, noting how the taxes changed, and claiming that change as a credit in 2016.
So, you have two methods you could use for handling the repayment in your taxes:
Method 1 - Itemized Deduction
Figure the tax for the relevant tax year, (2014 and 2015), claiming a deduction for the repaid amounts in each year. Repaid unemployment benefits must be deducted as a miscellaneous itemized deduction.
Method 2 - Credit for prior year taxes paid
Figure the tax for the current year claiming a credit for the repaid amount following these steps.
- Figure the tax for the "current year" (first 2015, then 2016) without deducting the repaid amount.
- Refigure the tax from the earlier year (2014) without including in income the amount repaid during the "current year" (2015/2016).
- Subtract the tax in (2) from the tax shown on the income tax return for the earlier year. (A two step process for you, as explained above.) This is the credit.
- Subtract the answer in step 3 from the tax for the "current year" (2015/2016) figured in (1).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 70, and enter “I.R.C. 1341” in the column to the right of line 70. (Though you can always take the "easy way out" and simply deduct the amount repaid in each year as a miscellaneous itemized deduction. This won't give you the best tax outcome, however.)
The IRS discussion about claim of rights is here: https://www.irs.gov/publications/p17/ch12.html#en_US_2015_publink1000172015
If you intend to claim the credit I believe you will have to use the "desktop" version of TurboTax, switch to "Forms mode" and manually input the amount on the face of the Form 1040 in the "Other Credits and Payments Smart Worksheet" that's between lines 72 and 73 on the Form.
OR
If you take the deduction go to the "Deductions & Credits" section of TurboTax and scroll way down the page to the "Other deductible expenses" interview. That's where the claim of rights deduction is entered.
Too, in order to "refigure" you 2014 income taxes "as if" you hadn't included the overpaid amounts that's easiest done using a 2014 desktop version of TurboTax, though you could also try redoing your income taxes manually
Tom Young
