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

[DoninGA]

Was the unemployment compensation received in 2020?  If so, did you get a refund from the IRS due to the unemployment compensation exclusion on a 2020 tax return?

[kusaii]

It was received in 2021

[DoninGA]

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@kusaii wrote:

It was received in 2021

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Did you repay all of the unemployment compensation you received in 2021?

[kusaii]

I'm yet to re-pay all of it yes, not yet though. its in my "over-payment balance" now.

[DoninGA]

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@kusaii wrote:

I'm yet to re-pay all of it yes, not yet though. its in my "over-payment balance" now.

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If you repay the any or all of the amount of unemployment in 2021 you will report the income and repayment on your 2021 federal tax return.  Use the Unemployment section under Wages & Income in TurboTax.  All of the federal taxes withheld will be reported on the 2021 return as a tax payment.  You will receive back a percentage of the federal taxes withheld based on the amount of unemployment that was repaid in 2021.

It would make tax reporting simpler if you repay the entire amount in 2021.

Otherwise -

If all of the 2021 unemployment is not repaid in 2021 then on your 2022 tax return you will have to report the amount repaid in 2022.  You can then use the Claim of Right to get a tax credit on the 2022 return.  This will take some calculations on your part that is outside of the TurboTax program.

See IRS Publication 525 for Claim of Right (I.R.C. 1341) page 36 Repayments - https://www.irs.gov/pub/irs-pdf/p525.pdf#page=36

[kusaii]

I understand what you are saying.

I want to mention that the amount of re-payment the department of unemployment is asking me to re-pay is actually without tax. Meaning that although I only received $7900, they are asking me to re-pay is $8800. So even though they deducted 10% taxes when they were sending me money, now they are asking me to re-pay more than what I actually received (since 10% were withheld from everything I received and now somehow they added it to the re-payment)

[DoninGA]

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@kusaii wrote:

I understand what you are saying.

I want to mention that the amount of re-payment the department of unemployment is asking me to re-pay is actually without tax. Meaning that although I only received $7900, they are asking me to re-pay is $8800. So even though they deducted 10% taxes when they were sending me money, now they are asking me to re-pay more than what I actually received (since 10% were withheld from everything I received and now somehow they added it to the re-payment)

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That does not sound right, but let me see if someone else has advice on this issue.

@Critter-3 Have you heard of this before?

[Critter-3]

Ok ... makes perfect sense ... they did get $8800 of unemployment (which is what needs to be repaid)  but some was sent to the IRS as  withholding and  will be reflected on the form 1099-G and they will get it back on their tax return when they file it next year.  

[kusaii]

So regardless of when I re-pay, when I file my tax return in 2022 I will for sure get all of the taxes I paid for unemployment benefits? which in this case is 8800-7900= $900? and which is why they are making me re-pay 8800 instead of 7900?

[Critter-3]

Not really ... if you don't finish paying back the entire amount in 2021 you will lose any deduction for the repayment going forward if you repay less than $3000 in a future year.   Any repayment in 2021 will be reflected on the 1099-G they issue in January. 

And all the withholding that happened  in 2021 will be reported on the 2021 return and any excess withholding becomes your refund.  

[kusaii]

So by default if I receive unemployment benefits and I pay 10% taxes on them, how much percentage of that 10% do I receive back in tax return?

[Critter-3]

You did NOT pay 10% on the unemployment you only had 10% withheld just like you have withholdings on your paycheck.  How much you will get back as a refund depends on the total income you had all year, what your filing status is, what your other credits will be and all the payments you made (like the withholdings) so your question really  cannot be answered.  Complete the income tax return to see what your bottom line finally is.

[kusaii]

Ok I will do that. Thank you for your help! Do I have to wait until January to do the tax return since I need to wait for the 1099?

[DoninGA]

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@kusaii wrote:

Ok I will do that. Thank you for your help! Do I have to wait until January to do the tax return since I need to wait for the 1099?

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Yes.  You must include the Form 1099-G the unemployment compensation received from the state.  The 2021 tax return cannot be completed until January 2022 at the earliest since many of the IRS forms, schedules and instructions have yet to be finalized for tax year 2021.