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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, you may deduct it on that year’s income tax return (claim of right).

How to Account for a Repayment

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

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 line 24 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% floor. Your total miscellaneous deductions must exceed 2% of federal adjusted gross income, and you may only deduct the portion above that level.

Repayment of 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 24 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% floor as described above.

  • Option 2: Claim a credit for the amount repaid on line 10 of Schedule M1REF. You must recalculate your tax amount for the year you originally received the income to determine the credit. The credit amount is the difference between your tax liability for that year with and without the income. Include a copy of the recomputed tax return showing the tax liability computed without the repaid income.

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

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