Can NYC Section 1127 payments, as a condition of my employment with NYC, be claimed as an employee expense on my Federal tax returns and where should this be entered?

Forum|Forum|7 years ago
June 6, 2019
1 reply
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I am employed by NYC but live outside of NYC. As a condition of my employment with NYC I am required to make NYC Section 1127 payments to NYC in lieu of City taxes. The NYC 1127 filing instructions clearly state that this payment is not a City tax even though the amount paid is the same as what would have been due for NYC's tax. Therefore, can this NYC 1127 amount be claimed as a deductible employee expense in my Federal tax returns?

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Best answer by DanielV01

Apparently this is deductible. Please see the following excerpt from Publication 529 (2017), Miscellaneous Deductions | Internal Revenue ... (click on link), where it discusses what types of expenses are allowed:

Licenses and Regulatory Fees

You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. (Italics added)

Occupational Taxes

You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you can't claim them as a deduction for taxes elsewhere on your return. (Italics added)

While NYC claims this is not a tax, their own definition "Section 1127 of the New York City Charter is not a payment of any City tax, but is a payment made to the City as a condition of employment..." (direct quote from the NYC Section 1127 Form) is remarkably similar to the IRS' definition of the Occupational Tax: "charged at a flat rate by a locality for the privilege of working or conducting business in the locality." Still, if the Section 1127 payment is not an occupational tax, then it most certainly fits the definition of a fee.

Either way, the amounts are deductible, not as city or local taxes, but as unreimbursed employee business expenses, which are subject to 2% of your AGI (and itemized deductions). In most cases, these expenses are claimed on Form 2106 or 2106-EZ.

{Edited 3/27/18: 19:45 PST}

DanielV01Answer

Level 15

Apparently this is deductible. Please see the following excerpt from Publication 529 (2017), Miscellaneous Deductions | Internal Revenue ... (click on link), where it discusses what types of expenses are allowed:

Licenses and Regulatory Fees

You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. (Italics added)

Occupational Taxes

You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you can't claim them as a deduction for taxes elsewhere on your return. (Italics added)

While NYC claims this is not a tax, their own definition "Section 1127 of the New York City Charter is not a payment of any City tax, but is a payment made to the City as a condition of employment..." (direct quote from the NYC Section 1127 Form) is remarkably similar to the IRS' definition of the Occupational Tax: "charged at a flat rate by a locality for the privilege of working or conducting business in the locality." Still, if the Section 1127 payment is not an occupational tax, then it most certainly fits the definition of a fee.

Either way, the amounts are deductible, not as city or local taxes, but as unreimbursed employee business expenses, which are subject to 2% of your AGI (and itemized deductions). In most cases, these expenses are claimed on Form 2106 or 2106-EZ.

{Edited 3/27/18: 19:45 PST}

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N

Nicole9

Level 2

I am a NYC employee who is moving out of NYC and will be subject to the Section 1127 waiver. (Essentially it the exact amount you would have paid as a City resident for NYC taxes, but instead, the City imposes it on you if you choose to live outside of the 5 boroughs and calls it a "Fee" instead of a "Tax.") I was looking for the section of the Tax Code that allowed this "Fee" to be deducted from my taxes and happened upon this response.

Unfortunately, as a result of the Tax Cuts and Job Act 2017, this "Fee" can no longer be deducted as a Miscellaneous Expense. Per IRS Publication 17 (2018) the deduction for miscellaneous itemized deductions suspended. "For tax years beginning after 2017, the deduction for job-related or other miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income floor is suspended. Armed Forces reservists, qualified performing artists, and fee-based state or local government officials can continue to claim eligible business expenses as adjustments in determining adjusted gross income. Employees with impairment-related work expenses can continue to claim eligible impairment-related work expenses as itemized deductions." In case you are wondering, fee-based state or local government officials does not cover most City employees such as cops, municipal workers, etc. It only covers officials who receive fee-based payments from the City, not regular wages. https://www.irs.gov/pub/irs-pdf/p17.pdf

The passing of the TCJA 2017 also no longer allows for this "Fee" to qualify as an Occupational Tax. Prior to the TCJA 2017, if you were an employee, you could claim occupational taxes only as a miscellaneous deduction subject to the 2% limit. Now that the TCJA 2017 no longer allows for miscellaneous deductions for anyone other than the very narrow group of 4 listed in Publication 17 (2018), the occupational tax deduction doesn't seem to be applicable either.

In summation, with the passing of the TCJA 2017, it seems that those of us who currently pay the Section 1127 "Fee" for the privilege of being employed by NYC but who live outside of its 5 boroughs, no longer have a way to deduct this "Fee."

A

ayannaddd

Level 2

Two conflicting responses. Can a tax expert clear this up? Is the additional fee as a NYC municipal worker not living in the city deductible? Is @Nicole9 right or is @DanielV01 right?