I may have to pay back my unemployment benefits that I earned in 2020 if I lose my appeal in Feb 2021. If so, can I deduct that amount from income for 2021 taxes?

[wellsgrey]

I received unemployment benefits from WA state in 2020 but then then state denied my claim so I appealed. If I lose appeal, then I have to pay benefits back in 2021. May I deduct the amount that I paid back on 2021 taxes?

[AmyC]

No. If you pay back $3,000 or more, you can take a credit, IRC 1341, based on what you overpaid this year by claiming the income. If you pay back less than $3,000, you are out of luck.

Here is the basic version:

1. Figure your 2021 tax as normal, without deducting the repaid amount.
2. Locate prior year taxes that are now incorrect. Note the amount of tax liability.
3. Refigure your tax from the earlier year(s) subtracting the income that you have repaid.
4. Subtract the difference in tax liability for each year.
5. Add all the differences together for your 2021 credit allowed.
6. Please see example and full details in my other post.