Unemployment Recaptured

[littleman]

I am working with a client who received Unemployment Compensation of $3074 in 2005. In 2006, she received a notice indicating that she did not qualify to receive the Unemployment Compensation of $3074, and that she was required to pay it back in full. In 2006, she repaid $1799 of the Unemployment Compensation leaving her with a current balance due of $1275.

She has not filed taxes for 2005 or 2006. How should the Unemployment Compensation be reported on the 2005 tax return? Should she list the entire balance of $3074 or should the amount she repaid be deducted resulting in reporting $1275? Or is she required to deduct the repaid amount on Schedule A of her 2006 tax return? She is a renter and taking the standard deduction is most beneficial for her.

Thanks!

[Corduroy Frog]

Unemployment Repayment

I believe the instructions say to report the repayment on the same line as Unemployment compensation, and to report it on a cash basis.

She would thus report the amount received on her 2005 return, and the amount repaid in 2006 as a negative on that line for her 2006 return. I don't think she is required to report it on Schedule A and thus lose her repayment because of taking standard deduction.

[Luis Mopeo]

Page 3-21 of TTB states "Repayment less than $3,000...If reported as wages, unemployment, or other nonbusiness income, deduct repayment as a miscellaneous itemized deduction subject to the 2% AGI limitation, line 22, Schedule A."

I had a client in this situation. It's not fair, they're taxed on the money they don't get, but I couldn't find any way around it.

[DaveO]

Luis has stated the sad truth

This is one of the most unfair bits of the code.

[Corduroy Frog]

I stand corrected

I stand corrected - looks like this has changed sometime in the last few years.

Converting real offsets to income such as this to a miscellaneous itemized deduction is a real rip-off. Same thing for employee business expenses - I have a basketball coach who loses a lot of deduction money to the 2% threshhold. The 2% also has to include his wife's salary in its base, unless he wants MFS.

All the better reason for employers to create accountable travel and expense plans. My coach would be better off taking a $2000 cut in pay, and then have these expenses reimbursed to him tax free with no itemization.

[JohnH]

That's the point

"Converting real offsets to income such as this to a miscellaneous itemized deduction is a real rip-off."

Do you think maybe this was IRS's intention? Punish the taxpayer hard enough and they'll complain to the employer, thus pressuring some employers to assume the burden of accountability and shifting it away from the IRS. Does anyone expect IRS to care about the dilemma of those employees caught in the crossfire?