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?

[hsingh1969]

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?       

[DanielV01 · Accepted solution]

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}

[Nicole9]

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."

[ayannaddd]

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?

[DawnC]

The NYC municipal worker fee is no longer deductible.   Both responses are correct - at the time they were written.   I know Daniel's answer says 2019, but it is actually from 2018 for tax year 2017.   Everything up to the summer of 2019 was in a Forum called Answer Exchange.  During the summer of 2019, all of Answer Exchange was moved here to the Community.   So, those older answers all reference a post date of 2019 when really the original date of the post could be anytime before 2019.     

So, Daniel's answer was correct in 2018 when it was written.   The Tax Cuts and Jobs Act changed this for tax years 2018-2025.    His response was written to someone filing a 2017 tax return, when the fee/tax was deductible as a miscellaneous expense on Form 2106.    But that is no longer the case; Nicole's response is correct and reflects current tax law.    The current tax law regarding Form 2106 - Unreimbursed Employee Expenses is:  

Job-related expenses for employees are no longer deductible on most people’s federal return in tax years 2018 through 2025 due to the Tax Cuts and Jobs Act (TCJA) that Congress passed and the President signed into law on December 22, 2017. However, the job-related expenses deduction is still available to people who work in one of these specific professions or situations:

• Armed Forces reservist
• Qualified performing artist
• Fee-basis state or local government official
• You're disabled and have impairment-related expenses

From - Can employees deduct any job-related expenses?

@ayannaddd 

[nycli]

I believe you can still deduct it as an employee expense in your NY State return. Isn't that correct? 

[PattiF]

New York state is one of the few states that still allows unreimbursed employee expenses to be deducted on the state return.

The federal return no longer allows a deduction for employee business expenses. There are a few states that still allow these deductions. Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania all provide a deduction for unreimbursed employee business expenses on their respective state income tax returns.

If you live in one of the states that still allow employee business expenses as a deduction, you would enter this in the federal return, and the information will be transferred to your state return.

Here's how to enter the information:

• Click on Federal Taxes (Personal using Home and Business)
• Click on Deductions and Credits
• Click on I'll choose what I work on (if shown)
• Scroll down to Employment Expenses
• On Job-Related Expenses, click on the start/update button
• Once in this section, you can enter union dues and any other employee expenses.

[dieselweasel1]

This is a good tip (about deducting 1127 contributions on the state return), but my NY state tax return keeps getting rejected, I think because the state tax authorities don't like that my W-2 doesn't list the 1127 contributions as a bonafide tax.  I did add into box 14, but it keeps getting rejected.  I have to print out the return and mail it in, but Turbotax is giving me a warning that you're not allowed to mail in a tax return prepared by tax software, so I'm in a pickle.  Give up a $3900 refund (efiling without the 1127 contribs included) or mail it in and almost certainly get an audit since it doesn't seem that most people write off the 1127 contribs.  Advice?

[alvinksu]

Hi, I'm having the same issue with this. 1127 used to be listed as local tax box 19 and able to deduct it from my state return. However, now it's on box 14 and if I enter it manually, It also gives me a warning and I cannot proceed E-fling. Any luck on this when you did yours last year?

[AmyC]

The rules changed for 2022. See Legislative highlight at 1127 - NYC.gov. 

See also NY NR Instructions and Personal Income Tax and Non-Resident Employees.

@alvinksu