Iraq

[BOB W]

A NYC Corrections Officer/ Airforce Reservist Captain served in Iraq for 10 months in 2003. NYC is demanding his active military pay be paid to NYC and he keeps his NYC pay. He was forced to pay them $21,000 in 2007.

My client wants to know how he gets back the taxes for the repayment. According the TTB a credit can be taken on line 70 based on the refigured 2003 tax return under IRC 1341. All well and good, I'l do that. When I reviewed his 2003 return his military pay was $25,757 and the taxable portion was $14,889.

Now my question is, since he has to repay $21,000 and his 2003 reservist W-2 taxable income is $14,889> what happens to the difference (6,111)? I realize that the line 70 adjustment can only be used for the tax incurred on his 2003 return, but something doesn't seem right. SOL for tax purposes I guess?????

I've asked him to tell me how NYC came up with the $21,000 figure, he has not gotten back to me yet.

[Golden Rocket]

SOL I guess

If the reduction in taxable pay stems from service-related military tax breaks, I agree that he is SOL. Also agree it's not fair, but the mechanics of squeezing out a tax credit from a situation where no tax was paid is tough to do.

In the largesse, only EIC taxpayers can get away with that...

There are a couple of different ways to look at this before giving in to SOL status.
1)Haven't read it thoroughly, but the section you mention DOES discuss creation of a NOL.
2)If NYC is simply trying to recover double payment, this guy should have received a W-2 for much more than what he is having to pay back. Apply the reduction against the NYC W-2 instead of his military pay. Don't know the circumstances as well as you do, but this may be a possibility.

[BOB W]

If the reduction in taxable pay stems from service-related military tax breaks, I agree that he is SOL. Also agree it's not fair, but the mechanics of squeezing out a tax credit from a situation where no tax was paid is tough to do.

In the largesse, only EIC taxpayers can get away with that...

There are a couple of different ways to look at this before giving in to SOL status.
1)Haven't read it thoroughly, but the section you mention DOES discuss creation of a NOL.
2)If NYC is simply trying to recover double payment, this guy should have received a W-2 for much more than what he is having to pay back. Apply the reduction against the NYC W-2 instead of his military pay. Don't know the circumstances as well as you do, but this may be a possibility.

This is what TTB says:

Repayments over $3,000. Taxpayer can choose to either:
– Claim a deduction. If the amount is a miscellaneous itemized
deduction it is not subject to the 2% AGI limitation. Enter on
line 27, Schedule A.
– Claim a credit for the repaid amount on line 70, Form 1040 calculated
as follows: Refigure tax from the earlier year without
the income that was later repaid. Subtract the refigured tax
from the tax shown on the original return. Enter the result on
line 70, Form 1040. Enter “IRC 1341” next to line 70.

The first choice says to claim as an itemized deduction (not subject to 2%).

Is the $21,000 a proper itemized deduction??????

[Golden Rocket]

That's the direction

Bob, that's where I was headed by mentioning the NYC W-2, and assuming the second of the TTB options.

Again, don't know all the circumstances, but I'm assuming NYC has a policy of paying only the difference between their normal pay and their military pay when activated. If this be the case, then there would be a W-2 from NYC far in excess of $21,000. Plus a W-2 from the Army for $14K in taxable income.

This should result in AGI in excess of $35K, probably FAR in excess of $35K. Then why would a subtraction of $21K exhaust AGI? Would that not be fair? Can't promise it would be much money in taxes, but it would be the amount he paid on the $21K to begin with.