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Volume 11 - Opinions of Counsel SBRPS No. 112

Opinions of Counsel index

Senior citizens exemption (income requirement) (retirement benefits - 401(k) plans) - Real Property Tax Law, § 467:

For purposes of determining income eligibility for the senior citizens exemption, an applicant may exclude from his or her income distributions from a section 401(k) plan provided the applicant can prove that those distributions were a return of his or her contributions to the plan. Such distributions should be considered as income for section 467 purposes to the extent the distributions are attributable to the plan’s earnings or interest or constitute a return of the employer’s contributions to the retirement plan.

Our opinion has been requested concerning the senior citizens exemption (Real Property Tax Law, § 467). An assessor has received a copy of a federal income tax return from a senior citizen homeowner that reports distributions from a section 401(k) plan. {1}  The question is whether those distributions should be included in the senior citizen’s income for the purposes of the exemption.

RPTL, section 467(3)(a), in relevant part, provides that:

Such income shall include social security and retirement benefits, interest, dividends, total gain from the sale or exchange of a capital asset which may be offset by a loss from the sale or 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. . . .

In 8 Op.Counsel SBEA No. 22, we discussed this provision in conjunction with Individual Retirement Accounts [IRA]. {2}  We noted that IRAs, as they then provided, permitted individuals to deduct and invest up to $2,000 from their gross incomes each year. The income earned by the IRA was exempt from federal income taxation until distribution. Upon distribution, those contributions and earnings were subject to income taxation. {3}

We expressed a very different conclusion re IRAs as income for purposes of section 467. As to IRA contributions, we noted that:

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.

That is, IRA contributions may not be excluded from a senior’s income for purposes of section 467 in the year the contributions are made.

We also opined that, since the earnings within an IRA are readily available without penalty to the senior citizen, {4} those earnings should be considered as income. Finally, since the distributions from an IRA consist of the amount invested and the earnings thereon, we concluded that the distributions should not be considered as income because to do so would effectively treat those moneys as income both going into and out of the account. While IRAs have evolved considerably since we issued 8 Op.Counsel SBEA No. 22 (e.g., annual contribution limits are higher; other types of IRAs, such as Roth IRAs, are now permitted), we continue to adhere to the same opinion regarding such accounts and section 467.

In subsequent years, we have applied a similar statutory analysis to other types of qualified retirement plan contributions that are returned to a now senior retiree as a plan distribution. For example, we stated in 11 Op.Counsel SBRPS No. 19, an opinion that concerns railroad retirement benefits (45 U.S.C. § 231 et seq.), that “[t]he portion of a pension or annuity distribution, which constitutes a return of principal (the original investment), is not income for exemption purposes since it merely represents a return of capital.” We also stated that “[u]nless the taxpayer can prove that all or a portion of these payments represent a return of capital, these payments would appear to ‘constitute’ ‘income’ within the meaning of section 467(3)(a)” (supra). {5}

We again apply a similar statutory analysis to that set forth in our aforementioned prior opinions (8 Op.Counsel SBEA No. 22 and 11 Op.Counsel SBRPS No. 19) to eligible deferred compensation plans (26 U.S.C. § 457) and qualified cash or deferred arrangement retirement plans (26 U.S.C. § 401(k)). That is, we conclude that employee contributions to such plans are not excluded in calculating the income of the employee in the applicable tax year for the purposes of section 467, but are excluded from income in the tax year when those employee contributions are returned as a plan distribution.

In this case, in our opinion, the senior may exclude from his or her income the section 401(k) distributions provided the senior can prove those distributions are a return of his or her contributions to the plan. It is further our opinion that such distributions should be considered as the senior’s income for the purposes of section 467 to the extent the distributions are attributable to the plan’s earnings or interest or constitute a return of the employer’s contributions to the section 401(k) retirement plan. {6}

September 20, 2007

{1}   The assessor also received a copy of the senior citizen’s Internal Revenue Service [IRS] Form 1099-R (“Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”).

{2}  The IRS advises that an IRA is “an individual retirement arrangement . . . a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages”.

{3}  Of course, if the IRA moneys were invested in an asset, which increased in value (e.g., a stock or mutual fund), the distribution might also reflect that gain. By the same token, a less successful investment may have resulted in a distribution less than the original investment and earnings.

{4}  Then, as now, money could be withdrawn from an IRA without penalty so long as the account holder was at least 59 ½ years of age. Recipients of the senior citizens exemption are usually 65 years of age or older, and in the case of a surviving spouse, at least 62 years of age (RPTL, § 467(1)(a), (d)), so IRA earnings are readily available to any applicant for the senior citizens exemption.

{5}  Similarly, in 9 Op.Counsel SBEA No. 70, we opined that retirement benefits paid by the New York State Employee’s Retirement System were income to a senior citizen exemption applicant except for that portion, if any, representing a return of the applicant’s contribution to his or her retirement plan.

{6}  We note that the IRS has stated that “in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both”.