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!