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Unemployment compensation is considered taxable income. It is reported on form 1099 by the state that pays it, or in the case of extended benefits, by the federal government. In a case where you have received an overpayment and send it back to either the state or federal government, you are entitled to reduce the amount shown on form 1099 by the amount of overpayment you send back.
How to Report the Overpayment
When you receive form 1099 from either the state or federal government, you must show this income on line 21 of federal form 1040. This represents the gross amount received. If you sent back a portion of the unemployment because of an overpayment, this amount should be deducted from the amount shown as income on line 21. In the description line of line 21 where the form asks for the type and amount of income, you should write “See attached detail.” On a separate page, provide the detail on the amount being reported. For example, if you received $6,000 in unemployment benefits, but paid back $1,000 due to an overpayment, you should show $5,000 in net income from unemployment on the detail page and carry this amount to line 21 of the federal form.
Keep your canceled check showing the refund you made for the unemployment insurance. This is important because the amount you show as income will not match the 1099 issued by the government, and the IRS may ask for an explanation and supporting documentation of the income being shown.
As an individual filer, you are considered to be a cash-basis filer, which means you recognize income and expenses in the year actually received or paid. For example, if you send the government a refund for unemployment overpayment after December 31, 2011, you’d have to show the refund as a miscellaneous deduction for the 2012 tax return and still report the full income in 2011.
You should consult your CPA or tax attorney to make sure you have reported the net income from unemployment correctly. This is to avoid a potential audit. When you report unemployment income, you must show the amount you received in the tax year and not wait for the 1099 from the government. A 1099 is just an information form and not attached to the tax return. For example, if you started receiving benefits in November of 2010 and continued receiving benefits into 2011, you must report the amount actually received in 2010 and report the balance received on the 2011 return.
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