99-033 Response March 10, 2000

99-033

Response March 10, 2000

REQUEST LETTER

Subject: Circuit Breaker - Definitions of income

Hello NAME,

There have been questions regarding what is to be considered income for purposes of the circuit breaker.

The statute regarding income for circuit breaker defines income as follows:

6) (a) (i) Income" means federal adjusted gross income as defined in Section 62, Internal Revenue Code, plus all nontaxable income as defined in Subsection (6)(b).

(ii) "Income" does not include:

(A) aid, assistance, or contributions from a tax-exempt non‑governmental source;

(B) surplus foods;

(D) relief provided under this part, Section 59-2-1108, or Section 59-2-1109.

(b) For purposes of Subsection (6)(a)(I), "nontaxable income" means amounts excluded from adjusted gross income under the Internal Revenue Code, including:

(i) capital gains;

(ii) loss carry forwards claimed during the taxable year in which a claimant files for relief under this part, Section 59-2-1408, or Section 59-2-1109; etc.

Here are some items of question not addressed in code. We need to know if the following are to be considered income for the circuit breaker. This decision will be issued for county use as well as our own.

1. Federal tax refunds

2. Federal child care credit

3. Federal earned income credit

4. Reverse mortgage income where a mortgage company is paying installments to the homeowner.

5. Payments or reimbursements made to individual volunteers under the Retired Senior Volunteers program and the Foster Grandparent Program established under the Older Americans Act of 1965; and to Vista volunteers, Senior Health Aides, SCORE, Senior Companions and ACE, programs under Sec. 418 of Public Law 93-113, the Domestic Volunteer Service Act of 1973.

Thank you for your consideration of these issues.

NAME

RESPONSE LETTER

March 10, 2000

NAME

ADDRESS

RE: Definition of Income for Purposes of the Renter=s and Homeowner=s Credits (ACircuit Breaker@) on Property Taxes

Dear NAME,

You have requested guidance concerning the definition of Aincome@ as it relates to circuit breaker tax relief. You have specifically listed five items of monies and credits and asked whether these should be considered Aincome@ when determining whether a person qualifies for the circuit breaker. By telephone, you also asked about a sixth item, whether a cash gift from a family member should be considered Aincome@ for these purposes.

The purpose of the circuit breaker is to provide property tax relief to certain taxpayers who have Aincome@ below statutorily mandated levels. For this purpose, the Legislature has defined Aincome@ to include not only amounts included in a taxpayer=s federal adjusted gross income (AFAGI@), but also some additional amounts to better reflect the resources actually available to the taxpayer to meet obligations. For example, should a taxpayer=s only incoming funds consist of $50,000 of nontaxable municipal bond interest, the taxpayer=s FAGI may be zero, yet the taxpayer would have $50,000 with which to pay his or her tax obligation.

Utah Code Ann. '59-2-1202(6) provides the definition of Aincome@ for purposes of the circuit breaker, as follows:

(6) (a) (i) "Income" means federal adjusted gross income as defined in Section 62, Internal Revenue Code, plus all nontaxable income as defined in Subsection (6)(b).

(ii) "Income" does not include:

(A) aid, assistance, or contributions from a tax‑exempt nongovernmental source;

(B) surplus foods;

(D) relief provided under this part, Section 59‑2‑1108, or Section 59‑2‑1109.

(b) For purposes of Subsection (6)(a)(i), "nontaxable income" means amounts excluded from adjusted gross income under the Internal Revenue Code, including:

(i) capital gains;

(ii) loss carry forwards claimed during the taxable year in which a claimant files for relief under this part, Section 59‑2‑1108, or Section 59‑2‑1109;

(iii) depreciation claimed pursuant to the Internal Revenue Code by a claimant on the residence for which the claimant files for relief under this part, Section 59‑2‑1108, or Section 59‑2‑1109;

(iv) support money received;

(v) nontaxable strike benefits;

(vi) cash public assistance or relief;

(vii) the gross amount of a pension or annuity, including benefits under the Railroad Retirement Act of 1974, 45 U.S.C. Sec. 231, and veterans disability pensions;

(viii) payments received under the Social Security Act;

(ix) state unemployment insurance amounts;

(x) nontaxable interest received from any source;

(xi) workers' compensation;

(xii) the gross amount of "loss of time" insurance; and

(xiii) voluntary contributions to a tax‑deferred retirement plan.

None of the six items you specifically ask about are reflected in FAGI. Thus, these items will be considered Aincome@ for circuit breaker purposes only if they are Anontaxable income,@ as defined in subsection (b). Subsection (b) defines Anontaxable income@ to mean Aamounts excluded from adjusted gross income under the Internal Revenue Code.@ While subsection (b) lists 13 individual items that are included in Anontaxable income,@ that list is not exclusive. Accordingly, under a broad interpretation, any amount of monies received by a taxpayer that is not included in FAGI becomes Anontaxable income@ for purposes of qualifying for the circuit breaker. We do not read the section that broadly. Instead, we believe the amounts must still be considered income in the generally accepted meaning of the word before it will be considered income under subsection (a)(i).

We believe the statutory intent in this regard can best be determined by examining the rather exhaustive list of examples of Anontaxable income@ included in the statute. These are primarily items that would generally be considered income in everyday usage, but are excluded from FAGI by specific provisions of the Internal Revenue Code. To use the example cited above, an ordinary person would consider interest received on a municipal bond to be income. Nevertheless, pursuant to '103 of the Internal Revenue Code, such interest is specifically excluded from FAGI. Accordingly, we will address each item separately to determine if it meets these criteria.

Federal tax refunds. Federal tax refunds are not income. They merely reflect an overwithholding of taxes. Taxpayer A, who has a $1,000 tax liability, but had $1,200 withheld, will receive a $200 refund. Taxpayer B, who has the same $1,000 liability, but had only $1,000 withheld, will receive no refund. That clearly does not mean that Taxpayer A has $200 more Aincome@ than Taxpayer B.

Federal child care credits. Child care credits are generally not Aincome.@ The credit only represents a reduction in the amount of tax a taxpayer must pay the federal government. The federal government=s decision to allow a lower tax payment does not constitute income.

There is an exception, however, for the amount of the child credit that is Arefundable.@ To the extent a taxpayer is qualified for a child care credit in excess of his or her tax liability, the taxpayer will receive a refundable credit under IRC '24(d)(4). That refund is not merely a reduction of tax otherwise due. It represents additional income to the taxpayer. As such, it is in the nature of Acash public assistance or relief,@ included in Anontaxable income@ under Section 59-2-1202(6)(b)(vi), and thus also included in Aincome@ under Section 59-2-1202(6)(a).

Federal earned income credits. The rule for federal earned income credits is the same as the rule for federal child care credits. In general, the earned income credit only represents a reduction in the amount of tax a taxpayer must pay the federal government. To the extent a taxpayer receives a refundable earned income credit under IRC '32, however, the taxpayer has essentially received cash public assistance or relief, includable in income for purposes of the circuit breaker provisions.

Reverse mortgages. Payments received by an elderly homeowner under a reverse mortgage are not income. Each payment to the homeowner is simply a loan that will be repaid from the sales proceeds of the home on the homeowner=s death. Thus, the reverse mortgage does not increase a taxpayer=s wealth any more than a conventional bank loan increases such wealth. It only converts a portion of taxpayer=s wealth into a more liquid form. Thus, although the reverse mortgage may generate cash that the homeowner could use to pay property taxes, it does so by reducing the taxpayer=s non-cash assets, not by generating additional income.

Payments or reimbursements to senior program volunteers. For purposes of the circuit breaker provisions, reimbursements certainly do not qualify as income as they are a repayment of the taxpayer=s own expenses. As to other payments made to a taxpayer under these programs, it is clear that the federal government does not consider them wages for federal purposes. United States Code Title 42, '5058. Section 5058 establishes that payments made to these volunteers are exempt from federal taxation and should not be treated as wages for purposes of the Internal Revenue Code and also provides that the payments should not be treated as income for Apurposes of unemployment, temporary disability, retirement, public assistance, workers= compensation, or other similar benefit payments...@ The circuit breaker program is a form of public assistance. As federal law precludes these payments from being treated as income for public assistance purposes, we conclude that these payments are not income for purposes of the circuit breaker provisions.

Gifts. In some sense, gifts are more problematic. They clearly increase a taxpayer=s wealth, and thus his or her ability to pay property taxes. Moreover, they would appear to be included in gross income for federal purposes and excluded from FAGI only by reason of IRC '102. In this sense, gifts are analogous to municipal bond income. On the other hand, the statute clearly provides that gifts from a tax-exempt nongovernmental source will not be included in income. Section 59-2-1202(a)(ii)(A). We are hesitant to attribute to the Legislature a desire to shelter recipients of charitable largesse, while taxing other people who receive the same amount of support from their own families. Moreover, we believe gifts and bequests are unlike the items specifically listed in Section 59-2-1202(b). Under common canons of statutory construction, the general language of that subsection should be interpreted in light of the specific items listed. Finally, gifts and bequests to family members are sufficiently common that the Legislature could be expected to specifically address such items if it intended them to be taken into account. Accordingly, we concluded that gifts and bequests should not be taken into account in computing a taxpayer=s income under Section 59-2-1202.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner