If it's later (like in a subsequent year) determined that a person who
received Unemployment Compensation was actually ineligible, and the
person returned the money, how is it fixed on tax returns?
If the return hasn't yet been filed, should the person wait until a
final determination is made and then just not declare the income on
If the return has been filed, should an amended return be filed?
You can either deduct the repayment on this year's return; or take a
credit by amending your prior year return, calculating the difference
in tax, keep the prior year return in your records, and take the
credit on this year's tax return (the credit is refundable).
This procedure is called claim of right. Evidently it you are
convicted of criminal behavior like fraud, then you can't utilize
claim of right.
The $3000 rule seems to discriminate against low-income taxpayers.
If you had to repay an amount that you included in your income in an
earlier year, 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. Generally, 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
Type of deduction. The type of deduction you are allowed in the year
of repayment depends on the type of income you included in the earlier
year. You generally deduct the repayment on the same form or schedule
on which you previously reported it as income. For example, if you
reported it as self-employment income, deduct it as a business expense
on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040).
If you reported it as a capital gain, deduct it as a capital loss on
Schedule D (Form 1040). If you reported it as wages, unemployment
compensation, or other nonbusiness income, deduct it as a
miscellaneous itemized deduction on Schedule A (Form 1040).
Repaid social security benefits. If you repaid social security
benefits or equivalent railroad retirement benefits, see Repayment of
benefits in chapter 11.
Repayment of $3,000 or less. If the amount you repaid was $3,000 or
less, deduct it from your income in the year you repaid it. If you
must deduct it as a miscellaneous itemized deduction, enter it on
Schedule A (Form 1040), line 23.
Repayment over $3,000. If the amount you repaid was more than
$3,000, you can deduct the repayment (as explained under Type of
deduction , earlier). However, you can choose instead to take a tax
credit for the year of repayment if you included the income under a
claim of right. This means that at the time you included the income,
it appeared that you had an unrestricted right to it. If you qualify
for this choice, figure your tax under both methods and compare the
results. Use the method (deduction or credit) that results in less
Method 1. Figure your tax for 2010 claiming a deduction for the
repaid amount. If you must deduct it as a miscellaneous itemized
deduction, enter it on Schedule A (Form 1040), line 28.
Method 2. Figure your tax for 2010 claiming a credit for the repaid
amount. Follow these steps.
1. Figure your tax for 2010 without deducting the repaid amount.
2. Refigure your tax from the earlier year without including in
income the amount you repaid in 2010.
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 2010 figured without
the deduction (Step 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 72, and enter ?I.R.C. 1341? in the column to the right of
An example of this computation can be found in Publication 525.
As for state issues it seems logical that states would let you use
claim of right. California does. Of course, unemployment is not
taxable in many states so this may not be an issue.
You mean if the prior year return has not been filed, what should they
do? It seems logical to file the prior year return counting the
amount listed in 1099-G, then file this year's return claiming a
credit for that same amount. If you just ignore the 1099-G it's
logical to you, but the IRS computers will send you a bill saying you
forgot to report 1099-G income and you'll have to create an amended
form, so might as well get it right now.
Also, on the prior year tax return you will owe interest. Say you
owed $2000 on 4/15/2010. You have about 1 years interest (4/15/2010
to 2/18/2011) if you pay that $2000 now, and besides also the original
tax return might have interest too because if you owe more than $1,000
on 4/15 then you made have interest penalty for not withholding
sufficient tax during the year, but that's another issue.