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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I owned the CA EDD Overpayment of $X,000 in 2011 but fully

Customer Question

I owned the CA EDD Overpayment of $X,000 in 2011 but fully paid to EDD this $X,000 + 30% penalties + interests in mid-2012. I deducted the $X,000 in 2011 Form 1040 in as fully paid. However, the IRS sent a letter saying the following:

"Unemployment is considered income and needs to be claimed in the year it is received. If this unemployment was repaid in a year different that the year that the income was received, repayments may be taken as a deduction on Schedule A, as a miscellaneous deduction, in the year it was repaid."

I have 2 questions:
1) If I owed the EDD the overpayment amount in 2011 but fully paid it with penalty + interest in 2012, why can't I fully deduct in 2011 federal income tax return? Instead of deduct it 2012 federal income tax return?

2) If I can't deduct it 2011 fed income tax return, why can't fully (100%) deduct it from 2012, instead of, on Schedule A, as a miscellaneous deduction, which caps at 2%?

I would appreciate any advice or IRS Code references, which you may have or are aware of.

Thanks very much in advance!

-MD
Submitted: 1 year ago.
Category: Tax
Expert:  Barbara replied 1 year ago.

bkb1956 :

Welcome and thank you for giving me the opportunity to assist you with your tax question.

bkb1956 :

Repayment of unemployment compensation.If you repaid in 2012 unemployment compensation you received in 2012, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. On the dotted line next to your entry enter “Repaid” and the amount you repaid. If you repaid unemployment compensation in 2012 that you included in income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. If the amount is more than $3,000, see Repayments, earlier.

bkb1956 :

Repayments


If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.


Type of deduction. The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. You generally deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).

 



Repaid social security benefits. If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefitsin chapter 11.

 



Repayment of $3,000 or less. If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23.

 



Repayment over $3,000. If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction, earlier). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax.
bkb1956 :

The reference I am citing is Publication 17. http://www.irs.gov/publications/p17/ch12.html#en_US_2012_publink1000172036

bkb1956 :

I hope this information is helpful to you. Please let me know if I can assist you further. Thank you.

Customer:

Hello BKB1956,I see ... You have confirmed the fact

Customer:

Hello BKB1965 -- You have confirmed the statement from the IRS. It seems that if I repaid the amount on 2011, I can deduct 100%. However, I repaid it in 2012, I can only deduct 0-2%. That is quite strange! Is there any other way around this? Thanks.

Expert:  R. Klein, EA replied 1 year ago.
Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

You have misunderstood the 2% miscellaneous deduction.

The full amount of repayment is deductible on Schedule A EXCEPT an amount equal to 2% of your total income.
So if your total income is $40k, you deduct $800 (.02 x 40,000) from the allowable amount. The rest is deductible if you itemize.

As the other expert noted, you can instead calculate what the tax difference would have been in 2011 and deduct that amount from your 2012 return.
Expert:  Barbara replied 1 year ago.

First expert here - I apologize that I was offline when you posted your follow-up. I want to be sure that you understand that if you choose to utilize Schedule A (if you itemize) you will deduct the TOTAL AMOUNT that is over 2% of your income

OR

you can choose to to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it.

It would be up to you to decide which method results in less tax for you.

Thank you and best regards.

Customer: replied 1 year ago.

Thanks bkb1956, randaltax, and Annne for the clarifications. Now I understand a bit more about the 2% misc. deduction. Still, I am not quite sure of the difference between "restricted" vs. "unrestricted" right method. Thanks.


 


- MD

Expert:  Barbara replied 1 year ago.

You are able to

EITHER

deduct the total amount repaid that is over 2% of your income

OR

take a tax credit for the year of repayment (if you believe you had an unrestricted right to it--which I'm assuming you did at the time).

Please let me know if I can assist you further. Thank you.

Customer: replied 1 year ago.

I have itemized deductions for 2011 and 2012. Thus, I have Schedule A's for both years. I repaid the amount on 2012. What Line of 1040 or Schedule A is "take a tax credit for the year"?


 


Thanks.


- MD

Expert:  R. Klein, EA replied 1 year ago.
MD:

To use the credit method, enter the amount of the credit on Line 71 of Form 1040 and enter "IRC 1341" in the column to the right of Line 71.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
R. Klein, EA and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thanks! All of you are extremely helpful!


If I may allocate the fee, 50% Kbk1956 and 50% RandallTax.


 


Thanks


- MD

Expert:  Barbara replied 1 year ago.
Just a short note to thank you for your excellent service rating and very generous bonus. It is most appreciated. If you have any questions in the future, please feel free to put "for bkb1956" in the subject line, and I will be happy to assist you. Thanks again, and best regards.
Customer: replied 1 year ago.

Thanks BKB1956! What is your real name, BTW?


- MD

Expert:  Barbara replied 1 year ago.

It's Barb.

Once again, thank you!

Customer: replied 1 year ago.

Dear Barb. & Randall,


 


In the entering the amount of credit in Line 71 of Year 2012/Form 1040,


do I enter the total amount of overpayment amount + EDD other charges, penalties, & costs OR enter overpayment amount ONLY?


 


Thanks.


- MD

Expert:  Barbara replied 1 year ago.

Hi, MD.

 

If you're utilizing Line 71, you're using the credit amount and would include the amount attributable to the unemployment you received in 2011 which you repaid in 2012.

 

Best regards,

Barb

Customer: replied 1 year ago.

If I use 2012 SA, which line(s) should I enter the amount of over-repayment and which line(s) should I enter the amount of penalties, charges, and other costs?


 


Thanks.


- MD

Expert:  Barbara replied 1 year ago.
You would list the total amount you repaid on Line 23 and list it as repayment of CA EDD. Then complete Lines 24, 25 and 26 to get the total for Line 27.
Customer: replied 1 year ago.

Thanks for your wonderful help, Barb.


- MD

Expert:  Barbara replied 1 year ago.

MD,

 

It's been my pleasure. If you have any questions in the future, please put "for bkb1956" in the subject line, and I will be happy to assist you.

 

Thank you and best regards.

 

Barb

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