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Part 3: Students in Tax Credit Housing
In the first article in our Tax Credit Basics series we discussed the importance of having a full “toolbox” of regulatory information at our fingertips. This powerfully assists us in effectively managing compliance at tax credit properties. Suggestions were made as to various handbooks and other specific documents to have on hand or on our computers. The second article used one of those tools, the HUD Handbook 4350.3, to gather information on the crucial topic of how income is calculated to determine tax credit eligibility for households. In this article, we will discuss rules relating to students in tax credit housing. This includes both how student status affects eligibility and how student assistance is counted as income. For this discussion the 8823 Guide, especially Chapters 17, provides a useful explanation of tax code.
It is important to realize that the tax code student rules, and even the 8823 Guide, leave a lot of room for interpretation. Also, state Housing Finance Agencies (HFAs) commonly add provisions. How does all of this apply to your property? We cannot answer this question definitively here, but we will indicate the questions to ask your HFA for several provisions as the article progresses.
Student status and eligibility
When examining a household’s eligibility for a tax credit unit, every household must be asked if every member in the household is a full-time student. If so, they may not be eligible.
Question for your state HFA: Do unborn children qualify as non-students?
The IRS has unofficially indicated “yes” at several industry conferences when asked this question, but this is not in writing.
It is also important to realize that the code defines a “full-time” student as a person who attended “full-time” as defined by the school they attend. Also, if they are “full-time” for any part of five months of a calendar year, they are considered students for purposes of the student rules for the rest of the calendar year, even after finishing school. Therefore, a person who was a full-time student as defined by their school from January until May 2nd is considered a student for tax credit purposes until January 1st of the following year.
The statute relating to students at tax credit properties can be found at § 42(i)(3)(D). Passages in this article in quotation marks in this font for the rest of this subheading are from this section. Although full-time student households are generally not eligible for tax credit units, the code provides that “a unit shall not fail to be treated as a low-income unit merely because it is occupied” by certain students or groups of students.
First the code lists persons who qualify because they are “a student who is any of the following.”
1. “Receiving assistance under Title IV of the Social Security Act.”
This is the primary federal welfare law which funds the Temporary Aid to Needy Families (TANF) program.
Questions for your HFA: What constitutes the “welfare” exception in your state?
The program that has replaced federal welfare in most states is named after the federal law, Temporary Aid for Needy Families (TANF), but a state may give it a different name.
2. “Was previously under the care and placement responsibility of the State agency responsible for administering a plan under part B or part E of title IV of the Social Security Act.”
This refers to former foster children or adults. A few states put a limit on how long in the past a foster could have been in the system and qualify. The law puts no time restrictions on this, so strictly speaking former foster members are non-students for life if the IRS were to monitor compliance in audit.
Questions for your HFA: Are there any state-rule time limits for how long it has been since a former foster household member was in the foster system and can still qualify for this exception?
3. “Enrolled in a job training program receiving assistance under the Job Training Partnership Act or under other similar Federal, State or local laws.”
This is not a reference to just any job training program. An examination of its mission statement demonstrates that the Job Training Partnership Act (JTPA) was designed to provide training to help persons who face serious barriers to employment enter the workforce. As the JTPA is no longer in existence, a state may designate what they consider to be “similar” programs. HUD has indicated that Workforce Investment Act programs have replaced JTPA (HUD 4350.3 Exhibit 5-1 16(f)), and so these federally-funded programs clearly qualify. Other state and local programs may as well.
Question for your HFA: Are there any specific state or local programs in our state that have been determined to be JTPA-similar?
The final two exceptions are for households made up “entirely by full-time students if such students are any of the following.” IRS officials have often indicated informally but publicly, that any person or combination of persons who meets the exceptions qualifies a household, even if other members do not. At least the “single parent” section of the IRS sample student form, Exhibit-17-1-student-status-verification - in the 8823 Guide indicates ‘yes”, but opinions on the actual wording of the Code differ. Some HFAs require that, for households meeting the following exceptions, every member must individually meet one of the exceptions.
4. “Single parents and their children and such parents are not dependents (as defined in IRC §152…) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children.”
Question for your HFA: Do a single parent and child in a household qualify the household, even if someone else (such as a non-parent boyfriend of a father in the unit) resides in the unit as well?
5. “Married and file a joint return.”
Another place in code indicates that any member who is “entitled” to file a joint tax return qualifies the unit. For several years, the IRS has stated that married people must simply be “entitled to file”, but a decreasing number of states impose a stricter definition that required a couple to have actually filed a tax return.
Questions for your state HFA: Must married students be “filing” a joint return, or simply be “entitled” to do so? Does one person who is entitled to file a joint return qualify the household, even if there are other non-married household members?
Student financial assistance income
When Congress made an adjustment to the Section 8 program, they added clarification on how student financial assistance income is counted for Section 8. As tax credit income is counted in a manner consistent with Section 8, these rules apply to many tax credit households. HUDs instructions for student financial assistance are found in Chapter 5 and Exhibit 5-1, Inclusions (9) and Exclusions (6) of the 4350.3. First, it is important to understand which households are subject to this rule. Per the 8823 Guide, Chapter 4, page 18, the IRS has determined that this rule applies very narrowly, only to household receiving Section 8 assistance. Practically speaking, this applies to residents who live at a tax credit property with project-based Section 8 and those that come to a property holding a Housing Choice Voucher. For other households, all student financial assistance is excluded. Even if the household is receiving Section 8 assistance, all financial assistance for 1) dependent full-time students living with their parents and 2) parents over age 23 with dependents in the household is excluded.
Next, it is important to understand that the student financial assistance that is counted as income is very specifically defined. It includes assistance provided (1) under the Higher Education Act of 1965 (such as Robert C. Byrd Scholarships or Pell Grants), (2) from private sources (parents or grandparents), or (3) from an institution of higher education (school scholarships). Based on other HUD guidance, other types of student financial assistance not fitting into these categories (such as GI bill benefits not specified for housing) are excluded, per Exhibit 5-1, Exclusions (6).
For student members of Section 8-assisted households, the three countable types of student financial assistance are added together and tuition is subtracted. Any remaining amounts are counted as income. Many have benefited from this CHART from our training manuals as a guide to determining if student financial assistance must be counted for tax credit and HUD section 8 purposes.
Other program student rules
Many tax credit professionals are responsible for properties that have tax credit funding as well as tax exempt bond, HUD Section 8, Rural Development or HOME funding. These programs all have student rules that must be followed to maintain the funding in addition to the tax credit rules. Although a full discussion of these other rules is beyond the scope of this article, a few comments here will be useful to get professionals started understanding these programs.
For many years, the Section 142 tax exempt bond program also prohibited full-time student households. It had only one exception, for married students entitled to file jointly. In 2008 this was changed and the bond program adopted all the same exceptions as allowed to tax credit properties.
For many years, the tax credit program had the most stringent student status rules. However, strict student eligibility rules were applied to HUD Section 8 housing applicable in 2006. A year later Rural Development applied the same rules and HOME followed suit in 2013. The HUD Handbook 4350.3 Chapter 3 provides a thorough explanation of the HUD rules. These rules target individual household members, not entire households. Full- or part-time students through age 23 who attend institutes of higher education are examined. Many exceptions are provided, but if the students cannot meet one of these, the household is not eligible for Section 8, RD or HOME housing. As the focus for the tax credit and Section 8-type student rules are completely different, both sets of student rules must be applied independently and a household must meet both sets of rules to qualify.
As we can see, our “toolbox” of useful guidance serves us well. We have seen how HUD and IRS documents provide a wealth of information on students, a crucial topic to understand for LIHTC professionals. Please read next month's Costello Blog post in which we will tackle another compliance basic and see how or regulatory “toolbox” gets us the right answers!
This and other topics (basic and advanced, tax credit and other programs) are covered in our in-person and webinar courses. Check out the schedule HERE.