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Last Updated: 12/22/2016

Deduction for Repayment of Previously Taxed Income (“Claim of Right”)

On occasion, you may have to repay income that was included on a previous year’s tax return because at the time you thought you had an unrestricted right to it. One example could be when you have to repay unemployment benefits that you received.

If your repayment is in the same year you received the income, no adjustment is needed on your Minnesota return (though it may affect your federal return). However, if you have to repay the amount in a subsequent year, account for the repayment in one of the following ways:

Repayment of $3,000 or Less

In the year of repayment, you may take a “miscellaneous” itemized deduction (for ordinary income items such as unemployment) on your federal Form 1040, Schedule A, “Job Expenses and Certain Miscellaneous Deductions”.  Since the deduction flows through to your Minnesota taxable income, no adjustment is needed on the state return.

Note: This deduction is subject to the “2 percent floor.” Your total miscellaneous deductions must exceed 2 percent of federal adjusted gross income (FAGI), and you may only deduct the portion above that level.

Repayment of More Than $3,000

You may choose whichever of the following options gives you the greatest tax benefit:

  • Take a deduction for the income in the year of repayment on your federal Form 1040, Schedule A, “Other Miscellaneous Deductions”.  Repayments over $3,000 aren’t subject to the “2 percent floor” (described above). No adjustment is needed on the state return.
  • Claim a credit in the year of repayment on your federal return. Recalculate tax for the year you received the income, but don’t include the income you repaid. The difference in tax – with and without the repaid income – is the amount of your credit. Report this credit on the “total payments” line of your federal return (for the year of repayment) with the reference “I.R.C. 1341.”

Minnesota Treatment if You Claim a Credit

If you claim a credit for repaid income, you may also do so on your Minnesota return. To get the amount of this refundable  credit, calculate the difference in state tax – with and without the amount you repaid – for the year you received the income. Report this credit on the “total payments” line of your Minnesota return (Form M1, Individual Income Tax) with the reference “M.S. 290.07, subd. 4.” View statute.