How HOTMA Will Affect HUD's Income Calculation Rules
HUD recently released its final rule for implementing the remaining Housing Opportunity Through Modernization Act (HOTMA) provisions. HOTMA was a bipartisan bill that sought to align and streamline public housing and HUD multifamily programs. For these programs, the changes under HOTMA touch upon multiple areas, including standards for income determination, resident self-certification, and interim reexaminations.
It’s important to be aware how HOTMA’s changes to HUD’s Section 8 program impact the LIHTC program. This is because tax credit law requires owners to use HUD rules regarding income calculations. According to Treasury Regulations §1.42-5(b)(1)(vii), “Tenant income is calculated in a manner consistent with the determination of annual income under Section 8 of the U.S. Housing Act of 1937.” And IRS Notice 88-80 reiterated this when it stated, “the income of individuals and area median gross income (adjusted for family size) are to be made in a manner consistent with the determination of annual income and the estimates for median family income under section 8 of the United States Housing Act of 1937.”
HUD says all of HOTMA’s provisions for its multifamily housing programs will become effective on Jan. 1, 2024. In anticipation of these changes, we’ll highlight the changes this final rule will make for income calculations for the LIHTC program, and we’ll keep you updated in the upcoming year as HUD makes more implementation information available.
Annual Income Definition
HUD’s final rule simplifies the definition of annual income. Currently, the HUD Handbook broadly categorizes income into three main types: earned, unearned, and asset income. As the name indicates, earned income is income from employment, self-employment, and military pay. Unearned income includes periodic benefit amounts like Social Security or pensions. It also includes welfare assistance and periodic and determinable allowances such as alimony and child support. Asset income is income that is received from assets.
Earned income. In the final rule, HUD expands the definition of “earned income” to explain that “transfer payments” (which are not included in earned income) mean payments made or income received in which no goods or services are being paid for, such as welfare, Social Security, and governmental subsidies for certain benefits.
Unearned income. HUD has also defined “unearned income” broadly stating that the term encompasses any annual income that is not earned income.
Asset income. The final rule establishes a higher threshold for imputing asset income. To incentivize families to build wealth without imputing income on those assets, HOTMA raises the imputed asset threshold from $5,000 to $50,000. This figure will be adjusted annually for inflation. It’s important to note that regardless of the asset amount, the actual income from assets continues to be included in income.
HUD says it will issue formal guidance in determining whether an item is a “necessary item of personal property” or whether the value of the item should be included in calculating the value of all non-necessary items of personal property for the $50,000 threshold.
Income Exclusions
As part of HOTMA, HUD is expanding and clarifying its list of income exclusions used when determining annual income.
Trust distributions. Distributions of principal from non-revocable trusts or a revocable trust outside the control of any member of the household, including special needs trusts are excluded. For these trusts, the final rule excludes from income distributions of the principal or the property that was transferred into the trust. Distributions of income, such as interest earned from the trust, used to pay the cost of health and medical care expenses for a minor are also excluded.
For a revocable trust or a trust that’s under the control of the family or household, any distributions from the trust are excluded from income, except that any actual income earned by the trust such as rent or dividends, regardless of whether it’s distributed, will be considered income to the family at the time it’s received.
Income for care of foster children and adults. HUD has excluded income payments received for the care of foster children or adults. With the final rule, HUD has clarified that the exclusion should also apply to Tribal kinship or guardianship care payments.
Insurance payments for personal or property loss. HUD has clarified with the final rule that insurance payments and settlements for personal or property loss are excluded, and these payments and settlements include, but are not limited to, “payments through health insurance, motor vehicle insurance, and workers’ compensation.”
Employment training programs. Payments from training programs funded by HUD or qualifying federal, state, Tribal, or local employment training programs (including training programs not affiliated with a local government) and payments from training a family member as resident management staff from the family’s income are excluded from income.
Payments to keep disabled family members at home. An exclusion applies when the payments to the family member are for the care of another member of the family living in the unit. The amounts paid directly to a member of an assisted family by a state Medicaid agency (including through a managed care entity) or other state or federal agency, or payments made by another entity authorized by the state Medicaid agency, state agency, or federal agency to make such payments on its behalf, to enable a family member who has a disability and wishes to remain in the unit are excluded from income.
Nonrecurring income. HUD has clarified the general exclusion on “nonrecurring income.” HUD is defining nonrecurring income as income that won’t be repeated in the coming year, based on information that the family provides. The exclusion also specifically states that income earned as an independent contractor, day laborer, or seasonal worker doesn’t count as nonrecurring income.
Additionally, to address other forms of sporadic income that would’ve been excluded under the previous blanket exclusion, HUD included additional information on what “nonrecurring income” consists of and offers specific examples, such as payments from the U.S. Census Bureau for work on the decennial Census or the American Community Survey that’s less than 180 days and doesn’t result in a permanent position; direct federal or state payments intended for economic stimulus or recovery; amounts received directly by the family as a result of state or federal refundable tax credits or refunds at the time they’re received; gifts for holidays, birthdays, or significant life events or milestones; non-monetary, in-kind donations from food banks or similar organizations; and lump-sum additions to assets such as lottery or other contest winnings.
Civil rights judgments or settlements. HUD added a new income exclusion that broadly excludes from income any amounts the family may receive from civil rights settlements or judgments regardless of how the settlement or judgment is structured. This reflects the fact that sometimes settlements or judgments of this nature are not lump-sum payments but instead may have a payment schedule.
While these civil rights settlement or judgment amounts are excluded from income, the settlement or judgment amounts will generally be counted toward the family’s net family assets. This is the case if the funds are deposited into the family’s savings account or a revocable trust under the control of the family. And the income generated on the settlement or judgment amount after it has become a net family asset is not excluded from income.
For example, if the family received a settlement and deposited the money in an interest-bearing savings account, the interest from that account would be income at the time the interest is received.
Retirement accounts. Retirement accounts are not considered a net family asset. And any income received from any account under a retirement plan recognized by the IRS, including IRAs, employer retirement plans, and retirement plans for self-employed individuals are excluded. However, any distribution of periodic payments from these retirement accounts will be income at the time they’re received by the household.
This change is intended to incentivize households to save for important life milestones and to provide administrative relief to sites by allowing them to stop verifying and calculating these assets altogether. As a result of this change, staff won’t have to go through the process of determining whether a household has “access” to such accounts.
Student financial assistance. According to the IRS’ 8823 Guide, for LIHTC sites, if an applicant or tenant doesn’t receive Section 8 assistance, all forms of student financial assistance are excluded from annual income. Financial assistance includes grants, scholarships, educational entitlements, work-study programs, and financial aid packages. It doesn’t matter whether the assistance is paid to the student or directly to the educational institution.
For households receiving Section 8 assistance, HOTMA mandates the exclusion of certain earned income for full-time dependent students and grant-in-aid, or scholarship amounts for such students. HUD excludes from income any assistance that the Health Education Act (HEA) requires to be excluded from a family’s income. HOTMA also excludes student financial assistance for tuition, books, and supplies, room and board, and other fees required and charged to a student by an institution of higher education.
However, for more than a decade, enacted on a year-by-year basis, HUD appropriations have included a provision that has created an exception to section 479b of the HEA for Section 8 income calculations. Because of the year-to-year nature of determining the exceptions in HUD appropriations, HUD plans to issue guidance about how to treat student financial assistance for Section 8 income calculations.