Its my understanding if someone pays unemployment compensation back for a prior tax year and the amount is $3,000 or less this amount is claimed as an misc. itemized deduction subject to 2%. This deduction is also required to be taken in year the payment is rendered. It appears that for someone who doesn't itemize, the tax benefit is lost? Why is that? What is the reasoning for this? I see if it is more than $3,000 than you have two options that result inleast tax: 1)To claim as misc. itemized deduction (not subject to 2%) or 2)Recompute the 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 "other payments" of the current return.