Unemployment compensation is considered taxable income and must be reported on Form 1040 as part of the taxpayer’s gross income. If a taxpayer received unemployment benefits during the year, they should have received Form 1099-G from the state unemployment office, detailing the total amount paid.
However, in some cases, taxpayers may be required to repay unemployment benefits due to overpayment or a later denial of eligibility. The way this repayment is handled on the tax return depends on the amount repaid and the year it was originally reported as income.
Reporting Unemployment Compensation
Unemployment compensation is included in gross income on Form 1040.
The total amount received is reported using Form 1099-G.
If any benefits were repaid in the same year, they are subtracted from the total unemployment compensation received.
Handling Repayments of Prior-Year Unemployment Benefits
If a taxpayer repaid unemployment benefits that were included in income in a previous tax year, the treatment depends on the amount repaid.
If the Repayment Was $3,000 or Less
The repayment cannot be deducted anywhere on the return.
If the Repayment Was More Than $3,000
The taxpayer has two options to claim a deduction or credit, whichever is most beneficial:
Claim a Tax Credit (Claim of Right Credit)
This may provide a refundable tax credit that reduces their overall tax liability.
Include It as an Itemized Deduction
The repaid amount can be reported under "Other Itemized Deductions" on Schedule A (Form 1040).
Choosing Between a Tax Credit or an Itemized Deduction
For repayments exceeding $3,000, the appropriate method depends on the type of income that was repaid.
If the repaid amount was previously reported as wages, taxable unemployment compensation, or other nonbusiness ordinary income, the taxpayer can:
✅ Claim an itemized deduction on Schedule A under "Other Itemized Deductions".
✅ Claim a tax credit, which may be more beneficial depending on the taxpayer’s overall tax situation.
Final Notes
✔️ Repayments of $3,000 or less cannot be deducted.
✔️ Repayments over $3,000 allow for either a credit or an itemized deduction.
✔️ Choosing between a tax credit and an itemized deduction depends on which method provides the greater tax benefit.
By following these guidelines, taxpayers can properly report unemployment compensation and any required repayments on their tax return to ensure accurate filing and potential tax savings.