What happens when I have to re-pay the unemployment benefits that I received and paid Federal taxes on?

[kusaii]

Sorry just to make sure of one last thing.

I applied for a "Overpayment waiver" with the Ohio department of unemployment and I'm waiting for their decision on that, and I might not get the decision this year. But they will either waive the full amount or they will reject the waiver and I would have to pay the full amount.

So if I dont pay the overpayment this year and I pay it in full next year ($8800 which is greater than $3000), I will still get the full refund of all taxes withheld? just more complex to file the tax return since I would have to do the "Claim of Right"?

[Critter-3]

The taxes withheld on the 2021 unemployment (along with all the unemployment income) will be reported as payments on the 2021 return and any excess withholding becomes part of the refund on the 2021 return.  

The 2022 "right of claim" will reduce  the taxes you owe on the 2022 return period.  If you will get a refund on the 2022 return depends on all your other 2022 income, credits and withholdings.  

[kusaii]

Well I'm an employee in a company and taxes get withheld from my paycheck automatically. So I'm assuming the taxes withheld are exact every year and they will stay that way for the coming years.

Therefore, for a 60K yearly income and 25% total taxes withheld, the 2022 "right of claim" would mean that my income for 2022 would be 60K - 8.8K(the overpayment paid back) = 51.2K. which means they would consider that they withheld extra taxes from me since they withheld 25% from 60K not 51.2K, and hence I will get a fair 2022 tax refund of the difference? sorry if its a bit confusing

[DanielV01]

@kusaii  The tax return is a reconciliation of your tax situation.  Withholdings from income (especially at the federal level) are almost never "exactly withheld".  This is why almost all returns result in a refund or an amount due.  

But here is how claim of right works:  In 2021, you will claim all of the income and withholdings that are reported to you.  Let's assume that in 2022 you end up paying back the entire 8800 because it's not forgiven (and it would behoove you to repay the entire amount if at all possible to do so).  In reality, this makes the claim "no longer income" on your 2021 return, but the IRS specifically forbids you to file an amended return for this situation (under Section 1341 of the Internal Revenue Code).  Rather, you are either allowed to claim a deduction of the income against your 2022 income (which is only valuable if your 2022 income is greater than your 2021 income and you are already itemizing deductions instead of the standard deduction), or you may claim a credit.  To claim the credit, you keep a copy of your 2021 return and run a "what if" amendment subtracting the income you received.  You note how much extra refund this would generate, and that is the credit you claim on your 2022 return.  Chances are extremely likely that the credit difference is greater than the $900 you had withheld from the original payments.  If in 2022 you would normally receive a refund, this credit would increase the refund.

[lusty008]

how to report overpaid unemployment compensation you repaid this tax year

[JamesG1]

If you received taxable income in 2020 and paid all or a portion back in 2021, you qualify for a claim of right repayment.

A claim of right repayment occurs when a taxpayer is required to repay income that they had reported and paid tax on in a previous tax year. The repayment must be of funds that, when received, the taxpayer had a reasonable belief he or she had unrestricted access to.

If you have an amount of $3,000 or less, follow these steps.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Did you have any of these less common expenses? select Repayments of $3,000 or less.

If you have an amount of $3,000 or more, follow these steps to report a deduction on line 16 of Schedule A Itemized Deductions.

• Go to Federal / Deductions & Credits / Your tax breaks / Other Deductions and Credits / Other Deductible Expenses.
• Click Start / Revisit to the right.
• At the screen Tell us about your other expenses, select Claim of right repayment over $3,000.

Payment of an amount of $3,000 or more may also be made by a credit on the 2021 Federal 1040 tax return.  Computation of the credit option is outlined here by KristinaK.

@lusty008

[CKO23]

My wife got unemployment payments during 2021 and the total amount is showing on the 1099-G.

On 12/30/2021 a decision was made by the unemployment department that she was paid double of what she should have.

We made this repayment on 1/5/2022 (much more than $3,000).

When we report this in TurboTax, do we answer to the question of "Amount of 2021 benefits repaid" as 0 and deal with a claim or do we submit the full amount we already repaid (which was in January 2022)?

[PattiF]

No, you don't submit the amount that you paid in 2022 for your 2021 tax return. You will need to enter the amount repaid on next year's 2022 tax return.

@CKO23

[CKO23]

If that is the case then TurboTax should change the verbiage of the question to clearly state "Did you pay back in 2021 any of your 2021 unemployment benefits". the current verbiage is misleading.

@PattiF