Stay on Top of Student Status to Avoid Tax Credit Loss

The slow economic recovery and high unemployment rates have created a surge in full-time enrollment among vocational schools and community colleges across the United States, according to research from the American Association of Community Colleges and the National Center for Education Statistics.

As more struggling Americans turn to postsecondary institutions to improve their skills for a discouraging job market, owners and managers need to make sure that they're keeping up to date with the full-time student status of their low-income households. The following recommendations will help you to ensure that your low-income units stay in compliance.

Clearly Define 'Full-Time Student'

It's important to make sure that both your site staff and the residents clearly understand the definition of a full-time student, says Quadel Consulting Corporation manager Annabelle Allard. “Confirming that residents understand the program rules is critical because it can help to ensure that they correctly complete the initial application form and prevent noncompliance from occurring after lease-up.”

The IRS defines a full-time student as someone who attends school for at least five months in a year, which do not need to be consecutive, and is enrolled for the number of hours or courses considered by the school to be full time. A full-time student can attend elementary school, junior or senior high school, college, graduate school, postgraduate school, or a vocational institution.

PRACTICAL POINTER: Allard recommends checking with your tax credit allocating agency about its understanding of the full-time student rule. “Make sure you're clear on how it defines the full-time student rule and the exceptions,” she says. “Get copies of and use whatever verification forms the agency has. If you choose not to use the recommended forms, see if the agency can review the forms that you're using to make sure that yours are acceptable.”

Know the Exceptions to the Rule

While you cannot rent a low-income unit to a household that is made up entirely of full-time students, the IRS has established five exceptions to the rule. You may continue to treat the unit as low income if:

• At least one member of the household receives assistance under Title IV of the Social Security Act (AFDC, TANF).
• At least one member of the household is currently enrolled in a job training program receiving assistance under the Work Force Investment Act (WIA; formerly the Job Training Partnership Act), or under another similar federal, state, or local program.
• The household consists of a single parent(s) with a minor child(ren), and both the parent and child(ren) are not dependents of a third party.
• All members of the household are married and have filed or are entitled to file a joint tax return.
• At least one member of the household has exited the foster care system.

The Housing and Economic Recovery Act of 2008 (HERA) expanded tax credit student rule exemptions to include students who have been part of the foster care system. Currently, there are no limitations based on the student's age or the amount of time since an individual was in foster care.

What types of verification are generally acceptable for a full-time student who was previously in a foster care program? “Managers can ask the social services agency that previously placed the applicant in foster care for verification,” Allard says. “It depends on the agency as to how easily and readily this verification can be received, but generally it should not be any more difficult than getting other types of verification. It helps to make sure that your verification form clearly states why you need the information verified and specifically what information you need. Again, your tax credit allocating agency may have a recommended form to use.”

A question that many managers raise is whether a pregnant resident's unborn child would count to qualify a household comprised of full-time students. “Managers should check with their tax credit allocating agency to find out its position on this,” Allard says. “We know some agencies that would consider the unborn child a household member for this purpose and would require only self-certification of pregnancy.”

PRACTICAL POINTER: Allard recommends that managers review their forms at least once a year to ensure that they are up to date with current regulations and list all current exemptions.

When Certifying, Look at Entire Year

A common oversight that site staff make when determining eligibility is to check whether a resident is a full-time student at the time of certification—and fail to consider whether the person was or will be a full-time student for at least five months out of the calendar year, says Stephanie Crouch, a compliance consultant with Quadel Consulting Corporation.

To ensure that the correct questions are asked, carefully review the wording on your application and verification forms, Crouch says. “Make sure that your forms clearly ask residents to certify their status for the entire calendar year—not just their current status,” she adds. “And train your staff to make sure that residents understand that they are being asked to explain their status for the entire calendar year, not just their current status.” (See our Model Form: Ask Applicants to Certify Student Status for Entire Year, for model language to include in your application and verification form.)

PRACTICAL POINTER: “Remember that the student rule is a household rule, not an individual rule, so the form used should be for all adult household members to sign,” says Allard. “Never assume that the form shouldn't be completed just because a household member doesn't fit the profile of a full-time student.”

Check Households’ Student Status Annually

The IRS requires owners to verify the student status of each low-income household annually—even at 100 percent LIHTC projects that no longer have to complete annual recertifications. The IRS has included a Student Status Verification form in its revised 8823 Guide [Exhibit 17-1, p. 17-5].

“Even though an owner may stop completing income recertifications, he must continue to require every household to sign a form certifying its status under the full-time student rule,” Crouch explains. “The form must be signed on the anniversary of the effective date of each resident's initial income certification. Of course, it's critical that the resident's lease include language about the full-time student status. Specifically, the lease must state that, if at future recertifications, it is discovered that all family members are full-time students, and the family doesn't qualify for an exception, the household will be ineligible for the program and will have to vacate the tax credit unit.”

For a Model Lease Clause, which gives you the right to transfer an ineligible household, raise its rent to market rate, decline to renew its lease, or end the lease in the middle of the lease term, see “Use Lease Clause to Prevent Problems When Households Violate Student Rule Mid-Lease,” in the March 2004 Insider, and available at www.taxcredithousinginsider.com.

Should you ask households to verify their full-time student status more frequently than once a year? It depends, says Allard. “Some managers may feel that the risk is so high that they want to check more frequently—for example, a household in which the qualifying household member is a part-time student or a household comprised of 100 percent full-time students that meets one of the exceptions. However, the regulation states that status must be checked only annually. Checking more frequently might not be feasible for the management company, depending on its budget and staff.” She recommends that you check with your state agency for its opinion on whether more verifications are necessary.

As an additional protection, you can include language in your lease that requires residents to notify you promptly of any changes to their full-time student status, such as the following:

Model Lease Language

Notification of Student Status. Resident agrees to immediately notify Landlord of any changes in the full-time student status of any member of the Resident's household. Further, Resident agrees to complete annually, or at any other such time requested by Landlord, a household Student Status Verification form.

Insider Sources

Annabelle O. Allard: Manager, Quadel Consulting Corporation; (202) 789-2500; LIHTC@quadel.com; www.quadel.com.

Stephanie Crouch: Compliance Consultant, Quadel Consulting Corporation; LIHTC@quadel.com; www.quadel.com.