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Volume 8 - Opinions of Counsel SBEA No. 22

Opinions of Counsel index

Aged exemption (income requirement) (retirement benefits - IRA’s) - RPTL, § 467; 26 U.S. Code § 408:

For the purposes of determining whether an applicant for the aged exemption satisfies the local income requirement, contributions to an individual retirement account (IRA) are not deductible; earnings on IRA’s should be considered as income; and distributions from IRA’s should not be treated as income.

We have been asked whether a 69 year old applicant for the aged exemption must include the undistributed earnings from his Individual Retirement Account (IRA) in computing his income for purposes of the exemption. According to the applicant’s bank statement, he received no distributions from his IRA in 1982 but did earn $4,958.55 in that account.

Among the requirements of section 467 is that the income of owner(s) of the property (including an owner’s spouse’s income where the spouse is not an owner) may not exceed the income ceiling established by the municipal corporation in which exemption is sought. Income is defined to include “social security and retirement benefits, interest, dividends, total gain from the sale exchange of a capital asset in the same income tax year, net rental income, salary or earnings, and net income from self-employment, but shall not include a return of capital, gifts, or inheritances.”

Section 408(a) of Title 26 of the United States Code defines an “individual retirement account” as “a trust created or organized the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets . . .[various enumerated] requirements.” Under the terms of an IRA, in general:

1. An individual may set aside and deduct up to $2,000 annually from his gross income for income tax purposes (26 USC § 219(b)).

2. No deduction is allowed for contributions made in the year the individual attains the age of 70 ½ or in any later year (26 USC § 219(d)(l)).

3. The income earned by an IRA is tax exempt until it is distributed (26 USC § 408(e)).

4. The distributions from an IRA (i.e., combined principal and interest) are fully taxable as ordinary income when paid out (26 USC § 219(d)(l)).

5. Distributions made before the year in which the payee attains the age of 59 ½ are subject to penalty, but distributions must be made or at least begin in the year in which the participant attains the age of 70 ½ (26 USC § 408(f)(a)); see also, 33 Am.Jur.2d, Federal Taxation (1984), ¶ 3900 et seq.).

Notwithstanding the Federal income tax treatment of IRA’s for purposes of determining eligibility for the aged exemption, in our opinion, contributions to such accounts are not deductible from income, and earnings on IRA’s should be considered as income, but distributions from IRA’s should not be treated as income.

Contributions to an IRA

To receive an aged exemption, property must be owned by all of whom are at least 65 years of age, except for property owned by a husband and wife, only one of whom need be 65, and except where property had been receiving an aged exemption based on an older spouse’s age and such spouse dies leaving a surviving spouse who is at least 62 years old (RPTL, § 467(1)). Thus, all applicants for the aged exemption are of an age to qualify to receive distributions from their IRA’s without penalty, and those applicants for exemption who are less than 70 ½ years old may still be making contributions to an IRA.

In our opinion, voluntary contributions to any retirement plan cannot be excluded from the computation of income for purposes of section 467. The purpose of the aged exemption is “to help elderly persons living on small fixed incomes to remain in their homes despite increases in real property taxes . . .” (Governor’s Approval Memorandum for L.1966, c.616, emphasis added). To allow persons to exclude contributions to voluntary retirement plans from their incomes and thereby qualify for exemption and shift the tax burden to others would be inconsistent with this stated intent.

In Engle v. Talarico, the Court of Appeals quoted the above-cited memorandum, and also stated:

The Legislature expressed no intention of incorporating the Federal or State tax rules into the exemption statute. Absent direction to the contrary, the term “income”, as used in the particular statute, must be judicially construed. That construction must be an accommodation between a common understanding of the term and the legislative purpose, however indefinitely projected by the statutory language (33 N.Y.2d 237, 240-41, 306 N.E.2d 796, 351 N.Y.S.2d 677, 679 (1973)).

In responding to inquiries regarding the income requirement of the statute, we have said that income includes unemployment insurance benefits (2 Op.Counsel SBEA No. 50), dependency and indemnity compensation (1 id. No. 109), and payments to a retired former employee from a non-contributory trust fund (5 id. No. 1). We have also concluded that personal medical expenses cannot be excluded from income (2 id. No. 65). Given the statutory purpose of section 467 and our prior opinions, we conclude that contributions to an IRA are not excludable from income for purposes of section 467.

Earnings on an IRA

We have stated that income for purposes of section 467 includes interest on U.S. Savings Bonds when the bonds are cashed (1 id. No. 98) and interest on U.S. Treasury Notes (6 id. No. 119). We have also stated, that “[i]nterest earned on a bank savings account . . . affect[s] the annual cash inflow of the taxpayer in that he is free to withdraw the amount of interest annually, or at any time he chooses, leaving the principal intact on deposit” (1 id. No. 98). Since all applicants for the aged exemption are more than 59 ½ years of age, the proceeds (including the earnings) in an IRA are as readily available to them as is interest in a bank savings account. Based on this fact and our prior opinions, we conclude that the earnings of an IRA are income for purposes of section 467.

Distributions from an IRA

Since it is our opinion that contributions to an IRA are not excludable from the income calculation, and earnings on such accounts should be included in income, the distributions from an IRA (representing principal and earnings), although taxable for Federal income tax purposes, should not be considered as income for purposes of section 467. To do so would be to treat the same moneys as income both when they are paid into and out of the IRA.

This latter consideration lends further support for our conclusion. It is our understanding that distributions from an IRA are not designated as being principal or earnings. This is because the full amount of the distribution is taxable and the status of the proceeds is irrelevant for income tax purposes. Since it is clear that no deduction for contributions to an IRA should be allowable for purposes of section 467, and those contributions are indistinguishable from the earnings thereon when distributions are made, it would not be feasible for an assessor to identify and consider only the earnings portion of an IRA distribution as income. From an administrative standpoint, therefore, it is also favorable to disallow a deduction for contributions to an IRA, to treat earnings on an IRA as income, but to exclude the distributions therefrom from the section 467 computation.

April 20, 1984