Do not know what to do. I Repaid an overpayment to my state unemployment office. Now I have a receipt for income tax purposes. How should I proceed with filing my taxes?

[eak115]

I received more than was I was supposed to be issued in unemployment insurance in 2020 and while filing for the taxes for it in 2021, taxes for 2020, I received a 1099-G listing what I was suppose to get plus the overpayment that I had to pay taxes on.  I was told this was okay and to go ahead and file. Now in 2022, I finally was able to get the overpayment issue resolved and the money sent back and I received a receipt stating that the funds were sent back and on the receipt it states "Please keep this receipt for income tax filing purposes". Now, with this I'm not sure how to proceed.  Would it be best to speak to a tax expert directly, Turbo tax or otherwise? If so, I could speak to a Turbotax expert I believe I bought that service last tax season if I'm not mistaken. Or would it be best to just go ahead and file?

[JohnW152]

You probably don’t need to contact a tax pro, just bear with the explanation.

It sounds like you made repayments in 2022 for an amount that was included in your 2020 income, is that correct?

If that’s the case, there’s no issue for you until you file your 2022 return, next year.

If you repaid it in 2021, you can address it this year, on the 2021 tax return you’ll file this year.

If you’ve had to repay more than $3,000 that you had included in your income in a prior year, you may be able to deduct the amount, or take a credit against your tax, in the year you repaid the income.  See Repayments in Publication 525, Taxable and Nontaxable Income for more information.

Repayments of amounts of $3,000 or less aren’t allowed as a Miscellaneous Itemized Deduction.  Please see IRS Publication 529, Miscellaneous Deductions.

To enter your Repayment in TurboTax Online:

1. If you’re on the Hi TurboTax Client, let's keep working on your taxes! screen, click the Pick up where you left off button

2. Click Federal in the left pane, if you’re not already there

3. Click Deductions & Credits in the banner

4. Scroll down and click Show more to the right of Other Deductions and Credits

5. Click Start to the right of Other Deductible Expenses

6. The first screen you get to that mentions repayment is for those of $3,000 or less; the screen after that addresses repayment of more than $3,000.

7. Enter all relevant information on the subsequent screens

[eak115]

Thank you for your response!

I sent in the funds to my stats unemployment office for the overpayment, totaling $4,106.00, in early January of 2022. The receipt I received lists January 31 2022 as the date received. So in this case, I wont have to worry about the repayment until I file my 2022 taxes next year. With this years taxes I will not need to worry about it the returned overpayment, based on what I understood from your post. 

Now, once I file my taxes for 2022, since the overpayment took place in 2020, would this impact my taxes negatively, increase the chances of an audit for example, given the time lapse? 

[DianeW777]

Yes, you are correct.  In 2022 you will have two options so keep your 2021 and 2020 (if the repayment included both tax years of unemployment received) tax returns close, you may need it next year. You will have two options next year because the amount of the repayment was over $3,000.  I will lay some ground work here for you now but it's definitely for next year. Read this before you decide which software to use next year (Online or CD/Download).

No this will not negatively impact your taxes at all.  It's a common situation.

Claim of Right

• If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to reduce your income by the amount repaid in the current tax year the amount you repaid is more than $3,000, or you may take a credit against your tax for the year repaid, whichever results in the least tax. 

1. Credit: If you choose to use the credit instead of the income reduction, then you would have to calculate that manually.
   • The tax return would have to be completed in the TurboTax Desktop version if the credit is used.  For assistance with this, see: How to switch from online TurboTax to the TurboTax software? and TurboTax Prior Year Products.
     1. Figure your tax for 2020 without deducting the repaid amount.
     2. Refigure your tax from the earlier year (the year you originally reported the income) without including in income the amount you repaid in 2020.
     3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
     4. Subtract the answer in (3) from the tax for 2020 figured without the deduction (step 1)
2. Income Reduction Method (most common): If you choose to use the income reduction method you can use the TurboTax Online or TurboTax Desktop.

Follow the steps below for the method you have selected.

Taking the Income Reduction in TurboTax

1. Login to your TurboTax account or open your tax return.
2. Click on Federal Taxes and then Deductions & Credits.
3. Locate the section Other Deductions and Credits (you may first need to click on show all tax breaks if working online or I’ll choose what I work on if working in the installed desktop version.)
4. Click Start (or Revisit) beside Other Deductible Expenses.
5. A number of questions will appear on the upcoming screens. You are looking for the one that reads Claim of right repayment over $3,000. Click yes when you see this screen. (Be sure to ignore the similar question, repayments of $3,000 or less.)

1. Enter the amount of the repayment in the box Claim of right repayment over $3,000 and click Continue.

Taking the Credit in TurboTax

There are two components to taking the credit in TurboTax. The first part entails determining the amount of the tax that was overpaid in the year the income was actually received. This requires using the TurboTax Desktop product (or another method) to determine what the tax liability would have been without the income. 

1. The credit can only be applied using the TurboTax Desktop product installed on a computer, in the Forms mode.
2. Switch to Forms mode by clicking on Forms icon in the program.
3. In the list of forms on the left click on 1040/1040RSR Wks above the Form 1040 itself.
4. Scroll down to Other Credits and Payments Smart Worksheet (near the bottom) and enter the amount that you have computed on Line D Claim of Right, IRC 1341 credit for repayments of prior year income.
5.  Click on the Step-by-Step or Easy Step icon in the upper right corner to return to the interview mode and finish working on your tax return.

@eak115

[Edited: 03/04/2022 | 1:57p PST]

[eak115]

Thank you for your response @DianeW777

The overpayment only occurred in 2020. The overpayment issue was the result of a miscalculation in my compensation during the weeks I was unemployed during the pandemic. After I called to double check, since my employer had taken out one of the PPP loans, they stated the amount I was paid would have to be returned and they would send a corrected amount to me for those same weeks and then close my account so I wouldn't keep receiving compensation when it wasn't necessary and thankful no other compensation, besides the corrected amount, was received. 

Given all the information in your comment. I'll need to just keep my 2020 tax return around, since the overpayment and the corrected amount I received only occurred in 2020. I'll probably keep my 2021 tax return around just in case. Other wise I'll just file my 2021 tax return like normal and prepare to correct the issue next year on my 2022 taxes.

[DanP0428]

I repaid unemployment this year and wondered how I would report that.  When I entered my 1099-G, there was a question about whether unemployment was repaid.  I clicked yes and the 1099-G had a box to put in the amount of the repayment.

[ErnieS0]

If you received and repaid your unemployment all in 2021 @DanP0428, then enter the amount repaid in the box you mention. TurboTax will subtract this amount from the taxable benefits on your 2021 return.

If you received and paid back unemployment in different years (for example received unemployment in 2020 and repaid in 2021) then you may be able to deduct the amount repaid from your income for the year in which you repaid it.

Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.

See Repayments