What to do for Taxes if you get a Work Benefit Overpayment

March, 08 2021 by Carolyn Richardson, EA, MBA

What should I do if I receive a notice for overpayment from work benefits with the workforce commission, and I have already filed my taxes?

-Shilo


Hello Shilo,

Thank you for contacting us about your notice from the Texas Workforce Commission (TWC) regarding your overpayment of benefits. We are going to assume that you received these benefits as unemployment compensation, and we hope this is correct.

The answer to your question will depend on what kind of notice you received from the TWC and what the notice is directing you to do with regards to the overpayment. Unemployment compensation is normally reported to the IRS on Form 1099-G. If you have already repaid these benefits during 2020 and this notice is just confirming the amount of the repayment, then you may need to amend your return. Filing an amended return may be beneficial if you reported the full amount of unemployment compensation you received and did not reduce the total by the amount you repaid during the year. The amount repaid during 2020 should be deducted from the amount you originally reported, which will reduce the amount showing on your return.

If you received a corrected Form 1099-G showing a lower amount of unemployment than you originally reported, you should amend your return by filing a Form 1040-X to correct the amount that you reported. If you had a balance due on your original return, this may reduce the amount due for 2020. If you paid the full amount due with the filing of your original return, the amended return may indicate a refund based on the lower corrected amount (make sure you indicate in the amended return the amount you paid when you filed). You do not need to do anything other than sign and date the amended return and mail it to the IRS. Amended returns may now be electronically filed, which will speed up the receipt of your refund. If you had a refund on your original return, this may generate an additional refund, but again, you must amend the return to receive that refund. If you owed tax on your original 2020 return, and you did not pay the entire balance due when you filed, you should include a check for the revised balance due when you file your 2020 amended return. Since the deadline for filing returns for 2020 is still a month and a half away, if you pay any balance due by April 15, 2021, the IRS should not impose any interest. Keep in mind that if you have yet to file your 2020 return, then you will not need to file an amended return to report the revised unemployment benefit amount.

If you are unable to pay the balance due when you submit your return, you can wait until you receive a letter from the IRS, updating your account balance. Once you receive this letter from the IRS, you can set-up a payment plan or make other arrangements based on your ability to pay. For information on the various payment options available, please review the Topic No. 202 Tax Payment Options webpage on the IRS website.

If the notice you received from TWC is more informational and not a corrected 2020 Form 1099-G, then likely there are instructions on the notice explaining how much you were overpaid and how the TWC wants this amount to be paid back to them. If the notice is regarding unemployment benefits overpaid in 2020, you will not need to file an amended return. In fact, doing so will likely generate a correction notice from the IRS requesting you to “fix” the return back to the amount reported on your Form 1099-G.

If the notice from the TWC is informing you that you were overpaid unemployment income in 2020 and need to repay the overpayment in 2021, the situation becomes a bit trickier. You can only deduct the repayment of overpaid unemployment compensation in the year in which you repay it (i.e., 2021). Whether you can deduct the repayment will depend on how much you need to repay.

If the amount to be repaid is $3,000 or less, you cannot deduct the repayment. Tax law prior to 2018 allowed these repayments to be deducted on Schedule A, Itemized Deductions as a miscellaneous itemized deduction, providing they exceeded 2% of your adjusted gross income when combined with other similar miscellaneous itemized deductions. The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deduction for these types of miscellaneous itemized deductions until after the 2025 tax year – meaning they are not currently deductible.

If the amount to be repaid is more than $3,000, however, you can still deduct this repayment as a miscellaneous itemized deduction on Schedule A when you file your 2021 federal tax return – but only if you claim itemized deductions instead of taking the standard deduction. These larger repayments are not subject to the 2% adjusted gross income limitation mentioned above. Repayments in excess of $3,000 are claimed on Schedule A without any reductions. However, you must itemize your deductions to claim the repayment amount. Whether it is beneficial to you to itemize will depend on your other allowable itemized deductions and your filing status. If you do not have enough deductions to itemize even with the repayment, then the repayment is again not deductible.

We hope that this answers your question, and that you are able to take advantage of any deduction for your repayments.

Best wishes,
Carolyn Richardson, EA