1127 Tax Issue

Many taxpayers who do not reside in New York City, but work for the City of New York or one of its agencies may have recently received a notice from the NYC Department of Finance regarding their 2025 Section 1127 filing.  A sample letter says the following:

Dear City of New York Employee,

We are writing to provide important information regarding your Section 1127 filing for tax year 2025. Section 1127 requires City employees who reside outside the five boroughs to make payments equivalent to the New York City personal income tax as a condition of employment.

We identified an error related to the School Tax Relief (STAR) benefit claimed on lines Al and A2 (Schedule B) of the Section 1127 return. STAR has been a credit against the New York State personal income tax since 2016, and it is not allowable on the Section 1127 return.

The Department of Finance calculated your filing without the STAR credit. This calculation resulted in a balance due or a reduction in your refund.

Please note that we will not recalculate your Section 1127 liability for tax years before 2025. You will not be charged any additional amount for those years, even though ST AR has not been an allowable credit since 2016.

To pay what you owe, please visit www.nyc.gov/eservices. Choose “Make a Payment (Quick Pay)” and then click “1127 Filing.”  You will be able to pay by entering the Letter ID referenced at the top of this notice.

We apologize for this error and any inconvenience it may cause you. If you have questions about this notice, please contact us at www.nyc.gov/eservices or email 11[email protected].

At issue is the credit deducted from your tax liability on Line 3 of Form NYC-1127 (taken from Schedule B – NYC, School Tax Credits, Lines A1 and A2).

NYC has recently taken the following position regarding these School Tax Credits:

The rules regarding the NYC School Tax Credit on Form 1127 stipulate that the credit is nonrefundable on this form and is strictly meant to reflect credits that would have reduced your NYC resident liability had you actually lived in the city. Because the NYC School Tax Credit is a benefit specifically aimed at mitigating tax burdens for actual NYC residents, it is claimed directly on the New York State personal income tax return (Forms IT-201 or IT-203) rather than through the 1127 return.

Your return was probably prepared in accordance with the original Form NYC-1127 and its instructions before this change was effectuated.

As a result of this change in tax position, all 2025 Form NYC-1127 filings were adjusted to eliminate this tax credit. The result is either an additional amount due or a reduction in your refund (as highlighted above, NYC does not plan to adjust any filing prior to 2025).

Most, if not all of these letters, were dated May 12, 2026. This was very poor timing by the NYC Department of Finance, because the filing due date of this return is May 15, 2026 (not April 15, 2026, like most other tax filings). This has created confusion and errors in the notice. If a payment was made as part of your Form NYC-1127 tax filing (either by check or electronically), the notice most likely did not give you credit for that payment.

We strongly recommend you contact your tax preparer before making any payment indicated in the notice to make sure you are not overpaying this tax.

THE DEA IS REVIEWING THIS ISSUE AND WILL BE CONSULTING WITH TAX ATTORNEYS.  AT THIS TIME, PLEASE BE GUIDED BY WHAT YOUR TAX PREPARER RECOMMENDS