The Revised 8823 Guide: Key Changes and Clarifications
On Sept. 25, 2009, the IRS released its revised 8823 Guide, which includes changes brought about by the Housing and Economic Recovery Act of 2008 (HERA), amendments to the HUD Handbook 4350.3, updated interpretations and guidance, and in-depth information on utility allowance procedures.
“On a first read-through, it may seem like there are some minor changes,” says housing expert A.J. Johnson. “But some of the changes are significant and even jaw-dropping. There are a few areas with subtle wording revisions, but they significantly change the approach that the IRS appears to be taking.”
Tax credit consultant Ruth Theobald Probst agrees: “Some of the revisions were expected, and most are regulatory updates. But there are some significant impacts that we didn't expect, which are very important.” She advises tax credit managers not to take the revision lightly or to ignore it. Instead, take the time to go through it and become acquainted with it because in clearly articulated areas, the guidelines that are presented become the IRS's current position until it releases more formal guidance.
With Johnson's and Theobald Probst's help, we'll review a few of the significant revisions related to household income. Next month, we'll look at additional updates to rent, income, and utility allowances.
HERA Modifications to Income Limits
For those who have been confused by all of the changes regarding income limits that came about through HERA, the IRS explains how to determine income limits in Chapter 4 of the revised guide.
Under HERA, income limits used to determine qualification levels and to set maximum rental rates for projects funded with Low-Income Housing Tax Credits (LIHTCs) and/or tax-exempt housing bonds are now referred to by HUD as Multifamily Tax Subsidy Projects (MTSPs)—which are calculated and presented separately from the Section 8 income limits. The “HERA Special” income limit is an additional set of higher income limits for HUD to hold harmless affected projects that had at least one building placed in service before Dec. 31, 2008. This new set of income limits came about because HUD changed the method by which it determines area median gross income (AMGI), which affected certain projects.
“The focus of the HERA Special is on these certain projects that could have been affected by this change of method, particularly in 2007 and 2008,” says Theobald Probst.
As the Guide explains, the “HERA Special 50 percent” and “HERA Special 60 percent” income limits “are applicable if the owner relied on the income limits provided by HUD to determine the income limits applicable to the low-income project and determined whether households were income-qualified based on those income limits (adjusted for family size) in either 2007 or 2008. If the project was already in service, or placed in service during 2007 or 2008, the owner relied on the income limits provided by HUD, and, therefore, the HERA special income limits should be used.” As an interesting and strange note, buildings that are placed in service in 2009 and after are not entitled to use these higher income limits.
Foster Children and Foster Adults
In the revised guide, the IRS supports HUD's current position—based on Change 3 to the HUD Handbook 4350.3—that foster children and foster adults do not count as part of a household's family members; however, when determining annual income, tax credit managers must include the earned income of foster adults, and the unearned income of both foster adults and foster children.
“This perspective of including the income of individuals who do not count as family members is unfortunate,” says Probst Theobald. She adds that some state agencies feel that this is a punitive approach to income qualifying, because “if you house foster adults and foster children who have earned or unearned income, it is counted as income for the family, but the foster adults and foster children are not part of the headcount for the family,” she says. “This seems incorrect, and we are asking HUD to clarify it.”
Changes in Family Size
The IRS adds specific guidance on how to handle move-ins of new household members to both mixed-use and 100 percent LIHTC projects. With the addition of any new member to an existing low-income household, tax credit managers must complete a full certification of that individual.
“While the household itself may not have to (re)qualify, we have to take an application from this new person, screen him, verify his income, add that income to the most recently completed certification in the household's file, and determine whether the new income places the household over-income,” explains Johnson. “If that is the case, then the available unit rule will apply to that unit.”
What happens if the original household member moves out leaving the new person behind?
“That individual would have to qualify at the time when the original household member moves out, or the household has to have qualified when the new person was added, as if it were a move-in at that time,” Johnson says. For example, a single woman moves into a tax credit unit in 2007. The site no longer conducts recertifications. In 2008, the resident gets married, and her husband's income is added under the 140 percent available unit rule. They divorce in 2009. She then moves out.
“Unless her husband qualifies in 2009 by himself, the site manager will have to go back to 2007, and look at the income that the original resident had when she moved in, combined with her husband's income in 2008 when he moved in. If the combined incomes would not have qualified them as a two-person household, then the husband will have to vacate the unit.”
Determining Annual Income
“The Guide repeatedly instructs us that if you cannot determine a household's income because they have little income, zero income, or the income fluctuates so that it's difficult to forecast for the next 12 months, you may look at the last 12 months of income information for that family,” says Theobald Probst.
In the case of income that is expected to terminate or that may terminate, such as unemployment compensation, “we will count only the income up to the point at which it terminates,” says Johnson. “So this will be a little bit different for tax credit managers than in the past, because they've always been taught to annualize unemployment. Now the IRS is basically saying that, if there is a source of income that is verified will terminate, you should count it only up to the point of termination. That will change the income that we show for the households a little bit.”
Educational Grants and Scholarships
The IRS also has clarified its position that, for students who are not receiving Section 8 assistance, all forms of student financial assistance, no matter how it is used, are excluded from annual income. Financial assistance includes grants, scholarships, educational entitlements, work study programs, and financial aid programs.
If, however, a student receives Section 8 assistance, then any financial assistance that she receives: (1) under the Higher Education Act of 1965; (2) from private sources; or (3) from an institution of higher education, in excess of tuition, is included in annual income, except if the student is over the age of 23 with dependent children, or if the student is living with her parents who are receiving Section 8 assistance.
“There has been confusion in the industry because grants and scholarships for students traditionally have not been counted at all,” says Johnson. “In 2005, HUD decided that grants and scholarships would be counted to the extent that they exceed tuition. HUD amended that in 2007 and said that we will count only those grants and scholarships in excess of tuition for students who receive Section 8 assistance.”
“The IRS now has made it clear that, unless there is Section 8 assistance, the full amount of grants or scholarships will not be included income,” says Johnson. “We're hoping that all of the states will now properly interpret and enforce that rule.”
While the industry adapts to these changes, it is important to watch your state's interpretations, says Theobald Probst. As has long been the case, state agencies have the authority to impose stricter standards and some will stand by existing rules.
Editor's Note: In the revised 8823 Guide, the IRS has indicated all of its revisions by placing asterisks before and after revised content. A yellow-highlighted version is also available for download from the TheoPRO Group's Web site: http://www.theopro.com.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; (757) 259-9920; http://www.ajjcs.net.
Ruth L. Theobald Probst, CPM, HCCP, SHCM: President, TheoPRO Compliance & Consulting, Inc., 21150 W. Capitol Dr., Ste. 3, Pewaukee, WI 53072; (877) 783-1133; firstname.lastname@example.org.
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