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Repaying Taxed Income Deduction

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You may have to repay income included on a previous year’s tax return because you thought you had an unrestricted right to it at that time. For example, you may have to repay your unemployment benefits or employer-provided disability benefits.

If your repayment is in the same year you received the income, it will not affect your Minnesota return but may affect your federal return. If your repayment is in a later year, however, you may deduct it on that year’s income tax return (“claim of right”).

How do I account for a repayment?

Your method will depend on whether your repayment was less than, equal to, or greater than $3,000.

What if my repayment was $3,000 or less?

In the year of repayment, you may take a “miscellaneous” itemized deduction (for ordinary income items such as unemployment) on line 20 of your Schedule M1SA, Minnesota Itemized Deductions. You may only take this deduction if you claim Minnesota itemized deductions.

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

What if my repayment was more than $3,000?

You may choose one of these two options, whichever provides you the greater tax benefit:

  • Option 1: Take a deduction for the income in the year of repayment on line 25 of Schedule M1SA. You may only take this deduction if you claim Minnesota itemized deductions. Repayments over $3,000 are not subject to the “2 percent floor” as described above.
  • Option 2: Claim a credit in the year of repayment on your federal return. Recalculate your tax for the year you received the income, but do not include your repaid income. Your credit amount is the difference in your tax – with and without the repaid income. Report this credit on the “total payments” line of your federal return (for the year of repayment) with the reference “I.R.C. 1341.”

If you chose Option 2 above, you may claim a refundable credit on your Minnesota return. To get the amount of this refundable credit, calculate the difference in state tax – with and without the repaid income – for the year you received the income. Report this credit on the “total payments” line of Form M1, Individual Income Tax, with the reference “M.S. 290.07, subd. 4.”

For more information, see Minnesota Statute 290.07, subdivision 4.

Note: You may not claim the Minnesota credit if you electronically file Form M1. Since you must include the statute reference above, you must file Form M1 by paper to claim the state credit.

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