repayment of unemployment

[daisy]

I have a client who was paid unemployment in 2005, and had withholding on it. 2006, he was told he has to repay it, it was given to him in error. He paid 1/3 of it in 2006, will pay back another 1/3 this year and the rest in 2008.

I believe the payment amount gets deducted from the AGI, so on the 2006, 2007, and 2008 returns, I will deduct the 1/3 payment he made. Also, nothing changes on the 2005 return.

I'm looking into this now, but if anyone here has any insight, or thoughts on this, I'd appreciate it.

Daisy

[Pacun]

***************************

[jainen]

>>I would use line 21 with a negative number<<

There is a technical term, "claim of right," that leads to a sometimes unfair result in a system that determines taxation by calendar year. Although it relates to a fairly common situation, the correct tax treatment may not be very well known. I have edited this post to remove the suggestion that any one particular tax rule should be or even could be universally agreed upon. I apologize that my earlier statement was phrased in a hurtful way.

According to Section 1341 income is taxable when received, even if it later turns out you have to give the money back. The repayment can not be treated as an adjustment to AGI. It is a miscellaneous deduction on Schedule A in the year of repayment, subject to 2% limitation, unless it is more than $3000. A higher amount can be taken as either a miscellaneous deduction NOT subject to 2%, or a non-refundable credit for extra tax determined by recalculating the prior year.

[GeneInAlabama]

>>I would use line 21 with a negative number<<

The deduction goes on Schedule A. If $3000 or less it is subject to 2% limitation. If more, not subject to 2% and there is another option, to take a credit for extra tax determined by recalculating prior year.

I apologize for speaking my mind so frankly, but we don't serve our clients or our industry by obviously improper work.

Jainen, I highly respect your knowledge of tax law, but I don't understand deducting this on schedule A. This was reported as INCOME in 2005, why would it not be a deduction to income when paid back? Do you have a cite for this? You don't list one.

You were quite harsh with this post. I believe many of us would have considered this a reduction to income and do not believe this to be "obviously improper work". Maybe I am wrong, and maybe almost everyone sees this as you do, but count me as one of those who would have done it "improperly".

This is a great board. I hope that none of us get to where we are afraid of showing our ignorance and not ask questions. This is the way we learn.

Gene

[Pacun]

Jainen,

Let's imagine for a moment that I got $15K from unemployment by mistake in 2005. I would repay it in 3 payments of $5K each year. Let say that my w-2 income is $90K for each of the 4 years in question. If I don't have any other itemized deductions, (based on your suggestion) I would have to pay taxes on the $15 and end of conversation. That's not what the IRS code intended. Before taking your suggestion, I would amend 2005.

[OldJack]

Jainen, I highly respect your knowledge of tax law, but I don't understand deducting this on schedule A. This was reported as INCOME in 2005, why would it not be a deduction to income when paid back? Do you have a cite for this? You don't list one.

What Jainen says has been in all your publications and handbooks for years. Here is Quickfinder quote and there is an example just like yours on page 5-18.

Repayments of IncomeRepayments of Income

Same year. A taxpayer who repays income (such as Social Security benefits repaid to the Social Security Administration or unemployment compensation repaid to the unemployment agency) in the same year the income is received can net the repayment amount against the amount reportable as income.

Earlier year. A taxpayer who repays income that was reported as income in an earlier year must claim a tax deduction for the repayment on the current year tax return (the year the income is repaid). (IRC §1341)

If amount of the repayment is:

• $3,000 or Less. Claim an itemized deduction on Schedule A as miscellaneous deductions (subject to the 2% AGI limitation). If the taxpayer does not itemize, the tax benefit is lost.

• More Than $3,000. Two options available (use the option that results in the least tax):

1) Claim an itemized deduction for the full amount of repayment (not subject to the 2% AGI limitation), or

2) Claim a tax credit on the current year’s return. Recompute tax for the earlier year as if the income had not been reported. The difference between the recomputed tax and the actual tax can be claimed as a tax credit on Line 70 of the current year’s Form 1040 (write “IRC 1341” next to the line). (IRS Pub. 525)

[GeneInAlabama]

OldJack, as least you gave me a source for the rule. I learned something today. I have a lot more things to learn.

Gene

[jainen]

>>why would it not be a deduction to income when paid back? Do you have a cite for this?<<

The citation is Section 1341, but you can look up "repayment of income" ANYWHERE. It might seem unfair in some cases, but it is what it is. What is YOUR reason for treating it as an adjustment to AGI? Is this opinion, which seems to have general acceptance on this board, based on anything at all? We can't just make things up, can we? I used the word "obviously" because all the major tax guides agree with the code and regs on this point. There is no legal basis whatsoever for amending the year the money was received, or for not treating it as an itemized deduction or credit when the debt is paid.

That's how I back up my opinion. If anybody can support using Line 21 for this, by citing ANY relevant reference, instruction, authority, precedent, or other guideline, I'm your obedient servant.

[GeneInAlabama]

Jainen, like I said in my earlier post, I highly respect your tax knowledge. I was just speaking from off the top of my head on what would seem logical. I KNOW the IRS is not logical, but you didn't give any basis for your statement. It wasn't my intention to give advice to the original post, I was just defending the fact that we sometimes ask dumb questions. I didn't say that we shouldn't deduct it on schedule A. I just said that I didn't understand why and asked why it should be done this way. To me, it wasn't obviously improper, but if I had had a case where money was repaid, I would have checked the rules before making an assumption. I don't REMEMBER ever having a case like this and I guess that is unusal because it doesn't seem like that unusual of a situation.

I wasn't questioning your answer. I guess I got my feathers a little ruffled due to the harshness of your response and I'm sorry for that. We need to remember that we don't always know everything we SHOULD know. Having vast knowledge of something can be a handycap because it sometimes causes us to not have the patience we should have with those who don't.

I don't usually respond in a negative way to things that I disagree with. Maybe this is just one of my bad days.

Gene

[daisy]

I found your response to be rude, if I was planning on doing "obviously improper work" I wouldn't be doing the research, nor would I have asked you guys what you think, I would've just done it.

Is this not the place to come, when we aren't sure about something?

Oh, please -- how can either of you think such a thing? You have never had any class or training that says to do it that way. None of your reference material suggests it. It is a blatant violation of the tax code, and is just plain wrong.

...

I apologize for speaking my mind so frankly, but we don't serve our clients or our industry by obviously improper work.

[OldJack]

OldJack, as least you gave me a source for the rule. I learned something today. I have a lot more things to learn.

Gene

Gene.. we all learn something new every day, or we are in the wrong business since tax is a never ending and changing subject. As a broad statement, seldom should a tax preparer every use 1040 line 21 on the 1040 since most tax items have been decided over the years for reporting on some form. Too often lesser experienced tax preparers simply use line 21 rather than take the time to research where the item should be reported.

[Pacun]

I like when Jainen comes hard on some of us because, believe me, I will never forget what was learned from that posting. This one seems to be one of those.

[OldJack]

>>I like when Jainen comes hard on some of us <<

One of the problems of typed messages on a tax forum is that it is easy to misinterpret the meaning behind a statement. One person may consider a statement as insulting while another may consider it as harsh, whereas someone else reads it as constructive criticism or informative. We should all be more aware of what we say and how we say it, likewise we should take note of what we ask and how we ask it.

[jainen]

>>Is this not the place to come, when we aren't sure about something?<<

Daisy, I never took issue with you asking the question. It deserved an accurate answer based on the tax code or at least what is normal practice in the industry. Your own proposed solution was neither, but in fairness you didn't describe how you meant to take the deduction, and you said "if anyone here has any insight, or thoughts on this, I'd appreciate it" (although there apparently are some thoughts that you do not appreciate after all).

Perhaps I over-reacted to the idea that the deduction should not only be mischaracterized but even specifically identified in a way that couldn't fail to attract IRS notice of the error. Here are my sentiments about that.

Every year one of the big stories is that some news agency took a tax return around to different preparers and got different answers. The public has a somewhat disapproving opinion of our professionalism in that regards. That really isn't fair because we spend a great deal of time and expense on research and updating and improving our skills. It is my feeling that tax opinions should reflect that study, so I am disturbed when they do not.

[daisy]

I didn't describe how I was going to take it, because I have no idea. I will be doing more research on it now.

I had found this earlier:

Workers who are laid off often become entitled to taxable supplemental unemployment compensation benefits. Subsequently, they may receive trade readjustment assistance, which generally is non-taxable except to the extent otherwise provided in Code Section 85. When this occurs, those workers may be required to repay previously received supplemental unemployment benefits. If the repayment is required because of the receipt of trade adjustment allowances under Sections 231 and 232 of the Trade Act of 1974, the taxpayer is entitled to deduct these repayments in computing AGI. Qualifying repayments are those made to trusts exempt from taxation under Code Section 501©(17) or to voluntary employees' beneficiary associations exempt from taxation under Code Section 501©(9). [26]

in Kleinrock Federal TaxExpert, but planned on looking into it further, because I don't think this covers my situation as far as it being 'supplemental' unemployment, or the reason for repayment is due to 'trade adjustment allowances'. This, so far, was the only item I found on the subject.

So, I planned on starting here, taking what you all say and trying to find more information. I wouldn't do anything obviously improper, nor do I do anything on a return if I'm not sure if it's correct. Especially with this one, because he had gone to H&R for many years, this year he came to me, and I found obvious errors on his return from last year. Nothing that will change his tax all that much, $100 or less errors, so H&R didn't do it to get him more money, they just did the return incorrectly. Who knows what is on all his other returns that I haven't seen yet.

So, I will still be researching more tonight, but what are your thoughts on this, He is paying ~$975/year for 3 years, and he's not itemizing and even if he was, he couldn't take this because of the 2%. The tax that he paid when it was withheld from his unemployment is now lost? There's no way for him to reclaim that? I'm going to be calling him in about an hour to get more info, but I believe the unemployment had something to do with him being in the Army Reserves and being called to duty in Mississippi for hurricane Katrina clean-up.

I don't mind thoughts, it was just the tone I read it in.

I am professional student, I love going to college, so I'm always going for something, and now I'm enrolled in my classes on-line, as much as I hate using them, our school recommends we use the emoticons, so there isn't much room for misunderstanding each other. It's funny, there's a guy in my class, so far we've been in two together, and I can't stand him, haven't ever met him, but the tone I receive from his posts and he doesn't use the emoticons, he comes across as a suck up and know it all.

Since I don't like wasting time trying to decide what all the emoticons mean, I just use this one all the time, well, one very similar to it. Though I do like this one, they don't give it to use as an option, but I may try using it there.

daisy

Daisy, I never took issue with you asking the question. It deserved an accurate answer based on the tax code or at least what is normal practice in the industry. Your own proposed solution was neither, but in fairness you didn't describe how you meant to take the deduction, and you said "if anyone here has any insight, or thoughts on this, I'd appreciate it" (although there apparently are some thoughts that you do not appreciate after all).

[jainen]

>>he's not itemizing... is now lost<<

I have an opinion on this which I have never seen anybody else agree with. In my opinion, he does not "lose" any deduction from not itemizing. Rather, he gets ADDITIONAL deductions that exceed what he is otherwise entitled to, because the standard deduction covers everything he can claim plus more.

The supplemental unemployment insurance described in the Kleinrock article would be private union benefits. Unions being a powerful lobby, they have special tax breaks for their own stuff.

[MAMalody]

I have an opinion on this which I have never seen anybody else agree with. In my opinion, he does not "lose" any deduction from not itemizing. Rather, he gets ADDITIONAL deductions that exceed what he is otherwise entitled to, because the standard deduction covers everything he can claim plus more.

I have been saying that for years. Good for you.

Mike

[JohnH]

Just for the record, I am another one who agrees with jainen & Mike concerning the standard deduction. It also makes for interesting conversation when trying to explain that the home mortgage & property tax deductions are not worth nearly as much as is often claimed for many itemizers.

[daisy]

I agree with what you are saying, but he is so close to the standard deduction, so close that H&R, who did this return before me, had him itemizing, by fudging a few numbers. I'm redoing their work, but correctly this time. He walked out of their office before paying because the preparer there, was asking him (the taxpayer) if certain items are deductible. He called me from the H&R desk to ask me, because neither of them were sure, and I told him to grab his stuff and leave, the tp shouldn't have to call another preparer, to answer questions for the current preparer. i've worked at H&R, but couldn't stand the prices I was charging the customers and the lack of knowledge in my office, but one thing we did have is plenty of research material and the things he was asking could've been found in their books.

So, he left and surprisingly, the preparer at H&R, not only gave him his paperwork back, but also printed up a "Not for Filing" copy of the return for him, that's how I caught their errors.

He makes an ok living, but he has to support 2 households, because he can't get a job in his field where his house is and his wife and daughter live, in Idaho, so he works in Washington, and travels back to Idaho most weekends to spend with his family. I tell him (we are good friends) to tell his wife to move to WA, but she won't. So, while being honest, I am trying to do the best I can for him, and get him the most back.

As I said before though, even if he did itemize, he still can't take this deduction because of the 2%.

About the standard vs itemized thing, I try to explain to clients and they still get frustrated when they can't itemize. I will say, you only had $2,000 in deductions so we are taking the standard.

They will reply, 'but that's not fair, can't we find more things so I can itemize?'

I say, 'no, we can only take what is allowable, and even if we did 'find' more, what's the difference, if we beat the standard by $100 and you can itemize, other than if you get audited, it may be more stuff you will need to prove and more work for me'

they say 'but don't you get more money back by itemizing? why should people with big mortgages be allowed to itemize, and not me?'

i say, 'in reality, you are getting more for not itemizing, they are only getting a deduction for exactly what they paid, you are getting a deduction for more than what you've paid out, you are the winner in this situation'

They still don't find this answer satisfactory and insist it's much better for them to itemize.

daisy

>>he's not itemizing... is now lost<<

I have an opinion on this which I have never seen anybody else agree with. In my opinion, he does not "lose" any deduction from not itemizing. Rather, he gets ADDITIONAL deductions that exceed what he is otherwise entitled to, because the standard deduction covers everything he can claim plus more.

[mcb39]

>>I like when Jainen comes hard on some of us <<

One of the problems of typed messages on a tax forum is that it is easy to misinterpret the meaning behind a statement. One person may consider a statement as insulting while another may consider it as harsh, whereas someone else reads it as constructive criticism or informative. We should all be more aware of what we say and how we say it, likewise we should take note of what we ask and how we ask it.

I did think that the original response was a little harsh, but have learned to recognize that different posters have different presentations. However, I, also, learned something new today as a result of the response. Also heartily agree with the itemized deductions discussion. :unsure:

[kcjenkins]

While Jainen is not always the most diplomatic poster here, he's trying to help you, Daisy. It would have been nice had he included the specific cite, but I imagine he thought that you would learn from looking for it yourself, once he had headed you in the right direction.

Please don't get your feelings hurt. Sometimes, WRITTEN answers can seem harsher than they are intended to be, since there is no way to hear the tone of voice of the responder. But just remember, everyone on here is offering their help freely, without compensation. So it's always best to assume the best intentions, unless the poster is CLEARLY intending to insult you. It that is what you think is happening, click on the little "Report" button at the bottom of the post, and the moderators will consider warning the poster about his/her tone.

[Lion EA]

When trying to explain why a client won't be itemizing, I try to put round (but actual to that client) numbers on it: "You have only $2,000 in itemized deductions, but you can deduct over $10,000 by taking the standard deduction. Let's take the more generous deduction and run with it, because it means a lower tax for you. Uncle Sam is giving you the benefit blah, blah, blah...."

It's been a dozen years since I took the HRB Basic course, but I still remember learning that repayments of prior year income have special rules, that Social Security and Unemployment were included in those rules, that $3,000 was a breaking point for options available, that Schedule A, Misc. 2%, was one of the options, etc. Then, when I get such a situation, I know to look up the details. (Maybe, this topic was actually in the old Intermediate course, but it was certainly within a year of beginning work for Block.) I don't try to memorize or know a lot of details (tax law changes each year; and it's not logical, it's just the law), but I do try to know what topics I will have to look up and where to look for them. When I have trouble finding sources, this board is invaluable for providing leads, cites, support, etc.

Thank you to all the responders who help us out, and thank you to all the posters who bring up topics that are new to me and expand my horizons as well as topics that jog my memory or reinforce my understanding.

[clay]

Janien was correct. Why are you folks so tough on her? Especially if you did not research the issue before deciding how to handle it!

[jainen]

>>Why are you folks so tough on her?<<

Thanks for the support, Clay. Although the answer was technically correct in terms of the tax code, my original post used abusive language. You are now seeing only my edited post.

[GeneInAlabama]

Just today, I am doing a tax return where a client received over $12,000 in social security in 2006 and paid it back in the early part of this year. This thread has been especially helpful in this situation. Without having to look up the information, I know to count it as income this year and either take it as a misc deduction not subject to 2% or take a credit for it next year. This board is GREAT and I appreciate the wealth of knowledge that is available here. Thanks everyone. This situation is due to client taking early retirement at 62 and then having very high income all of a sudden. I was supprised that SSA allowed him to pay it back.

Gene