In an individual tax return, unemployment compensation is considered part of the gross income reported on Form 1040. If the taxpayer received unemployment compensation during the year, they should have received Form 1099-G after the year ends, showing the amount they were paid.
Occasionally, taxpayers may need to repay unemployment benefits because they were later denied or because they received more than they were entitled to. The repaid amount is reported separately from Form 1099-G. To enter the repaid unemployment compensation amount from a prior year, note the following:
If the taxpayer repaid unemployment compensation that had been included in income in a previous year (other than the current year), how the repayment is treated on the tax return depends on the amount.
If the repaid amount is $3,000 or less, it cannot be deducted anywhere on the return.
If the repaid amount exceeds $3,000, the taxpayer can either calculate a claim of right tax credit or include the repaid amount as an itemized deduction, depending on which option is more beneficial. More information can be found here.
If the taxpayer repaid more than $3,000 that had been included in their income in a prior year, they may:
Reduce their income,
Deduct the repaid amount under Other Itemized Deductions on Schedule A (Form 1040), or
Take a refundable tax credit.
The treatment of the repayment as a reduction in income, an itemized deduction, or a tax credit depends on the type of income.
For wages, taxable unemployment compensation, or other nonbusiness ordinary income:
If the income exceeds $3,000 and was previously reported as wages, taxable unemployment compensation, or other nonbusiness ordinary income, the taxpayer can either include the repayment under Other Itemized Deductions on Schedule A or calculate a tax credit, depending on which option is more favorable.