How to Report Repayment of Unemployment Benefits on Tax Return

If you received unemployment benefits that you were later required to repay, you may be able to recover the taxes you paid on them. This situation can happen due to overpayments by the state agency. The method for reporting this repayment on your federal income tax return depends on whether you repaid the benefits in the same year you received them or in a later year. Following the correct procedure ensures accurate tax filing.

Required Tax Forms and Information

Before addressing the repayment on your tax return, you must gather specific documentation. The primary document is Form 1099-G, Certain Government Payments, from your state unemployment agency. This form reports the total unemployment compensation paid to you in Box 1, and this amount may not be reduced by any repayments you made.

You must also have clear proof of the repayment to keep with your tax records. Acceptable proof can include canceled checks, bank statements showing the payment, or an official receipt from the agency acknowledging the repayment.

How to Report Same-Year Repayments

When you repay unemployment benefits in the same calendar year that you received them, the reporting process is straightforward. You report the net amount of benefits you kept by subtracting the amount you repaid from the total reported on your Form 1099-G. For example, if your Form 1099-G shows you received $10,000 but you repaid $2,000 that same year, you would report $8,000 of income.

This net figure is entered on the unemployment compensation line of Schedule 1 (Form 1040). On the dotted line next to this entry, you should write “Repaid” and list the dollar amount of the repayment. This notation explains why the amount you are reporting does not match your Form 1099-G.

How to Report Subsequent-Year Repayments

If you repay unemployment benefits in a year after you received them, the process is different. Since you already reported the full amount as income and paid tax on it, you cannot amend the prior year’s return. Instead, you must claim a deduction or credit on the tax return for the year you make the repayment.

If your repayment is $3,000 or less, you cannot recover the federal taxes paid on that amount. There is no longer a federal deduction available for these smaller repayments made in a subsequent year.

When the repayment exceeds $3,000, you have two options under the “claim of right” provision found in IRS Publication 525. This rule applies because you had a right to the income when you received it but were later required to return it.

The first option is to take the repayment as an itemized deduction on Schedule A (Form 1040).

The second option is to calculate a tax credit. First, figure your tax for the current year without taking the deduction. Then, re-calculate your tax for the prior year as if the repaid amount was never included in your income. The difference between the tax you originally paid for that prior year and this new, lower tax amount is your credit, which you can apply to your current year’s tax.

You should calculate your tax liability using both the itemized deduction and the credit. You can then choose the method that results in the lowest tax.