If I had to repay disability income after a retroactive Social Security disability award pushed it into 'claim of right' territory, and I took the federal standard deduction rather than itemizing, can I get any New York income tax relief for the repayment?

Subject

Whether, for New York personal income tax purposes under Article 22, Patricia Bytner is entitled to any deduction or credit for the $6,400 in disability income that she received and paid tax on in 1992, but was required to repay in 1993 as "claim of right" income after a retroactive Social Security disability award — given that she took the federal standard deduction rather than itemizing on her federal return.

Plain-English summary

Petitioner received and paid federal and New York personal income tax on disability income in 1992. On February 5, 1993, a Social Security Administration Administrative Law Judge determined she was totally and permanently disabled effective July 24, 1991, and awarded her Social Security disability benefits retroactive to that date. Because that retroactive award overlapped with the disability income she had already received and been taxed on, she had to repay $6,400 in 1993 — most of the taxable disability income she had received and paid tax on the prior year.

The question was how to treat that $6,400 repayment for New York income tax purposes. Federally, IRC § 1341 gives "claim of right" relief for income that had to be repaid after it turned out the taxpayer never had an unrestricted right to it. Federal law requires a taxpayer to use whichever of two methods produces the lower tax: (1) deduct the repayment in the year it is repaid (IRC § 1341(a)(4)), or (2) instead compute a credit equal to the decrease in tax the prior year would have shown had that income simply been excluded back then (IRC § 1341(a)(5)).

If a taxpayer uses the deduction method and itemizes federally, she automatically gets a corresponding New York itemized deduction under Tax Law § 615, since New York itemized deductions piggyback on federal itemization. But if a taxpayer instead uses the § 1341(a)(5) credit method federally, that federal credit is not allowable on the New York return at all, because Article 22 contains no equivalent credit provision.

The Department held, however, that using the credit method federally doesn't change the underlying fact that a deduction would also have been allowable under the general federal rules for repayment of claim-of-right income (citing the Department's own prior ruling, Matter of Anthony Pope, TSB-H-80(515)I, and the controlling federal cases U.S. v. Lewis and Healy v. Commissioner, which hold that a repayment of claim-of-right income is deductible only in the year it is actually repaid). So for New York purposes, an itemized deduction is allowed in the year of repayment as if the taxpayer had claimed it as a federal itemized deduction — regardless of which of the two federal methods she actually used.

Petitioner's problem was that she did not itemize deductions federally at all; she took the federal standard deduction, because for her the § 1341(a)(5) credit method happened to produce the lowest federal tax. Under Tax Law § 615, a New York taxpayer may claim a New York itemized deduction only if federal taxable income is also determined by itemizing. Because Petitioner took the federal standard deduction under Tax Law § 614, she was barred from itemizing on her New York return too. The result: because Petitioner took the federal standard deduction rather than itemizing, she received zero New York deduction or credit for her $6,400 claim-of-right repayment.

What this means for you

Individuals repaying disability benefits or other claim-of-right income after a retroactive SSDI award

If you receive a retroactive Social Security disability award that overlaps with disability income you already reported and paid tax on, and you have to repay some of that income, New York relief is not automatic. New York only recognizes claim-of-right relief through the itemized-deduction channel under Tax Law § 615. If you take the federal standard deduction — even if that's the choice that minimizes your federal tax bill using the IRC § 1341(a)(5) credit method — you get no New York deduction or credit whatsoever for the repayment. Before deciding how to file federally, it's worth checking what that choice costs you on your New York return, not just your federal one.

Accountants and tax professionals choosing between federal claim-of-right relief methods

When advising a client on which IRC § 1341 method minimizes federal tax, remember that the two methods are not treated symmetrically by New York. The § 1341(a)(4) deduction-in-year-of-repayment method, if itemized federally, flows through to a New York itemized deduction under Tax Law § 615. The § 1341(a)(5) prior-year-tax-decrease credit method has no New York counterpart at all, and if choosing it federally also means the client takes the federal standard deduction, New York relief disappears entirely under Tax Law § 615 and § 614. A client whose federal tax is lowest under the credit method combined with the standard deduction may come out worse overall once the lost New York deduction is factored in — that combined outcome is worth modeling before advising a filing approach.

Common questions

Q: Why did Petitioner end up with no New York relief at all for the $6,400 she repaid?
A: Because she took the federal standard deduction rather than itemizing. New York's only mechanism for claim-of-right relief is the itemized deduction under Tax Law § 615, and Tax Law § 615 allows a New York itemized deduction only if federal taxable income is also determined by itemizing. Since Petitioner did not itemize federally, she could not itemize on her New York return either, and Tax Law § 614 (the standard deduction) left no room for any repayment-related benefit.

Q: Why doesn't New York have anything like the federal IRC § 1341(a)(5) credit?
A: The opinion states plainly that Article 22 of the Tax Law does not contain a similar credit provision. New York's relief for claim-of-right repayments runs exclusively through the itemized-deduction route, not through any credit tied to a hypothetical recomputation of a prior year's tax.

Q: Does it matter which federal method (the § 1341(a)(4) deduction or the § 1341(a)(5) credit) the taxpayer actually used?
A: Not for whether New York itemized-deduction treatment is available in principle — the Department held that a taxpayer who used the § 1341(a)(5) credit federally could still get the equivalent New York itemized deduction, because a deduction would also have been allowable under the general federal repayment rules established in U.S. v. Lewis and Healy v. Commissioner. What actually disqualified Petitioner wasn't her choice of § 1341 method; it was that she took the federal standard deduction rather than itemizing at all.

Q: Could Petitioner have gotten New York relief if she had itemized her federal deductions instead of taking the standard deduction?
A: Based on the opinion's reasoning, yes — if her federal taxable income had been determined by itemizing, she would have been allowed to include the $6,400 repayment as a New York itemized deduction under Tax Law § 615, regardless of which of the two IRC § 1341 methods produced her lowest federal tax.

Q: What is "claim of right" income, and why did the repayment count as that here?
A: Claim-of-right income is income a taxpayer received and reported under an apparent, unrestricted right to it, which later turns out not to have been rightfully hers, requiring repayment. Here, Petitioner had received and paid tax on disability income in 1992; when the retroactive Social Security disability award covering the same period came through in 1993, the overlap meant she had to repay $6,400 of that previously taxed income, which the ruling treated as a repayment of claim-of-right income under IRC § 1341.

Q: Does this ruling mean claim-of-right repayments never get any New York tax benefit?
A: No. It means the benefit is conditioned on itemizing. A taxpayer who itemizes federal deductions and includes the repayment among them will receive a matching New York itemized deduction under Tax Law § 615. The gap in relief only arises for taxpayers who take the federal standard deduction, since Tax Law § 615 ties New York itemization strictly to federal itemization, and Article 22 has no other mechanism (like the federal § 1341(a)(5) credit) to fall back on.

Citations and references

• IRC § 1341(a)(4) - allows a federal deduction for claim-of-right income in the year of repayment
• IRC § 1341(a)(5) - allows a federal credit equal to the decrease in tax the prior year would have shown had the income been excluded, if that produces a lower tax than the deduction method
• Tax Law § 615 - permits a New York itemized deduction only if federal taxable income is also determined by itemizing; New York itemized deductions otherwise track federal itemized deductions
• Tax Law § 614 - the New York standard deduction, which Petitioner used in lieu of itemizing
• Matter of Anthony Pope, Dec St Tax Commn, December 12, 1980, TSB-H-80(515)I - prior Department ruling establishing that using the § 1341(a)(5) credit federally doesn't negate that a deduction would also have been allowable under general repayment rules
• U.S. v Lewis, 340 US 590 - establishes that repayment of claim-of-right income is deductible only in the year of actual repayment
• Healy v Commissioner, 345 US 278 - reaffirms the year-of-repayment deduction rule for claim-of-right income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a94_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-94 (8) I
Income Tax
July 5, 1994

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I940419A

On April 19, 1994, a Petition for Advisory Opinion was received from
Patricia Bytner, 44 Nardin, Depew, New York 14043.
The issue raised by Petitioner, Patricia Bytner, is how to treat, for
personal income tax purposes under Article 22 of the Tax Law disability income
received and taxed in 1992 but paid back in 1993 as "claim of right income".
Petitioner received and paid Federal and New York State personal income tax
on disability income in 1992.
It was determined on February 5, 1993 by an
Administrative Law Judge for the Social Security Administration of the Department
of Health and Human Services that Petitioner was totally and permanently disabled
commencing on July 24, 1991. Petitioner was awarded social security disability
benefits back dated to July 24, 1991. Petitioner had to pay back $6,400, which
was most of the taxable disability income she received and paid taxes on in 1992.
Section 1341 of the Internal Revenue Code ("IRC") provides relief for
"claim of right" income required to be paid back during the taxable year. Under
the provisions of section 1341 of the IRC, a taxpayer's Federal income tax
liability is required to be computed using one of two separate methods. The
first method allows a deduction in the year of repayment (section 1341(a)(4) of
the IRC); while the second method computes the tax liability without such
deduction and subtracts therefrom the decrease in tax from the prior year which
would result solely from the exclusion of such disputed income from gross income
for such prior taxable year (section 1341(a)(5) of the IRC), whichever method
results in the lowest tax.
If a taxpayer deducts the repayment in the year paid as an itemized
deduction for Federal income tax purposes, the taxpayer would automatically
receive the deduction as a New York State itemized deduction under section 615
of the Tax Law. If the taxpayer claims a credit on the taxpayer's Federal return
based on a decrease in tax for the prior year, such credit is not allowable on
the taxpayer's New York State personal income tax return because Article 22 of
the Tax Law does not contain a similar credit provision.
However, the special credit provision contained in section 1341(a)(5) of
the IRC does not alter the fact that a deduction would have been allowable under
the other applicable provisions of the IRC (Matter of Anthony Pope, Dec St Tax
Commn, December 12, 1980, TSB-H-80(515)I). A deduction for the repayment of
amounts previously reported as income under a "claim of right" is allowable as
a deduction only in the year of repayment (U.S. v Lewis, 340 US 590; Healy v
Commissioner, 345 US 278). Therefore, for New York State personal income tax
purposes an itemized deduction would be allowed in the year of repayment of
"claim of right" income as if the taxpayer had claimed such deduction as an
itemized deduction on the taxpayer's Federal income tax return.
TP-9 (9/88)

-2­

TSB-A-94 (8) I
Income Tax
July 5, 1994

Herein, Petitioner did not itemize her deductions for Federal income tax
purposes, so the lowest tax for Federal income tax purposes resulted by claiming
a tax credit pursuant to section 1341(a)(5) of the IRC.
Section 615 of the Tax Law states that "[i]f federal taxable income of a
resident individual is determined by itemizing deductions from his federal
adjusted gross income, he may elect to deduct his New York itemized deduction in
lieu of his New York standard deduction. The New York itemized deduction of a
resident individual means the total amount of his deductions from federal
adjusted gross income, other than federal deductions for personal exemptions, as
provided in the laws of the United States for the taxable year, with the
modifications specified in this section .... "
Accordingly, for purposes of computing the New York itemized deduction
under section 615 of the Tax Law, Petitioner is allowed to include, as a federal
itemized deduction, the amount of the repayment of amounts previously reported
as income under a "claim of right". However, pursuant to section 615 of the Tax
Law, if Petitioner does not itemize deductions for Federal income tax purposes,
Petitioner may not itemize deductions for New York State personal income tax
purposes. Where Petitioner takes the standard deduction under section 614 of the
Tax Law, no deduction is allowed for the amount of the repayment of amounts
previously reported as income under a "claim of right".

DATED: July 5, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.