Senior Citizen and Disabled Persons Exemption from Real Property Taxes for Washington State Counties

Tax relief for Washington State starts at the County level. Some say it is real and others will say that it is just deferred. But whether it is just tax relief or deferred every citizen and resident should be able to claim the amount or have reduced the amount which is by law their money.

While being a typical income tax preparer and having some compassion for a low income couple I was dutifully assigned to help in the task of preparing their Snohomish County Reduction Form, Form SNOH-64-002. With a copy of their income tax return retrieved from the file I filled in the information as requested according to the particular form. My first inclination was that the form must somehow be inaccurate. I filled the information in and provided an income tax return with the Schedule D as provided. Since the couple was not married as assumed that both would need to have separate forms completed. I was absolutely wrong on this interpretation. The form wanted me to fill out information for a "domestic partner" but since the couple was not a married couple I did not include the others information. A domestic partner in the State of Washington is required to fill out a piece of paper. I assume they also pay a fee. But instead the law indicated they must combine their income if they are cotenants. In the interpretation here is if the two live together and own the house together.

The rub here comes in the form interpretation itself. Below are my direct observations and interpretation as looked at when reading the RCW 84.36.383(5)(a-i). I am only seeing an interpretation or reference to adjusted gross income in the RCW and no reference to Gross Income. However, when I get to the forms the instructions are completely leaving out any references to Adjusted Gross Income and only are addressing Gross Income with some deductions or modifications.

If you go to the form you will see what I mean. The form is essentially the same for each county with some variations. Go to after line 5. or after the Parcel Number or line 6.

Snohomish County analysis:

Here it says, "All Gross Annual Income and/or Deductions of Claimant, Spouse, Co-tenant, or Domestic Partner"(*1). As per the RCW 84.36.383(5) the reference should be "plus all of the following items to the extent they are not included in or have been deducted from adjusted gross income:(*2)

The key here is the deducted from adjusted gross income. The "adjusted gross income" is only on page 1 of the Form 1040, 1040A, and 1040EZ, and 1040NR. This is if it is referring to personal income. Modified adjusted gross income or other similar terms may be retrieved from for instance the worksheet for social security but in no other location have I noticed the wording "adjusted gross income" on another form. So here you can see that the is trying to gather some information from the front page of the 1040, etc. For instance the box 5 of the social security can be either taxed and thus included in the 1040 adjusted gross income at a rate of 0%, 50% or 80% and based upon the social security worksheet. The correct amount to gather is the box 5 of the social security form or SSA-1099, box 5. This instruction comes from (5)(g).

Let's take number 6B. This is asking for Pension and Annuities receipts. The taxable amount here should be the correct amount to gather. This would be the amount included on Form 1099-R, box 2a and not box 1a. Here there should be no adjusted from the adjusted gross income. The form is supposed to be asking for "disposable income". The word of emphasis is "income". The difference between box 1 and box 2a is the return of capital and should never be construed as "disposable income". The instructions are asking for Pension and annuity receipts from (5)(d) and is misleading also in its original. The RCW 84.36.383 (5) is asking for "disposable income" and not for receipts. But this should be asking for disposable income receipts which could only be referring back to Form 1099-R, Box 2a and not box 1.

Let's take number 6C. Here the amounts for municipal bonds need to be included in the disposable income. See your Form 1040 or 1040A, line 6b. Add this amount back into your number. However when it comes to Dividend receipts my interpretation of disposable income would not include dividends which are returns of capital. These should not be showing on your Form 1040 or 1040A anyways. Dividends from corporations and not banks which are truly interest income are sometimes reported on a Form 1099-DIV but should be reported on Form 1040, line 8 for taxable interest income or line 8b for municipal bond interest income. Refer back down to (5)(h-i).

Let's take number 6E. Here the clerks ask for your Schedule D. They want to calculate what the amount is for all gains but they do not want you to calculate any losses nor to include any losses. Again, this is incorrect when referring back to the RCW. RCW 84.36.383(5)(b) says to deduct for loss. This as from (5) above requires one to specifically look at amounts deducted from adjusted gross income. No mention in the law is referring back to or asking one to refer back to Schedule D. The maximum amount of loss which already would be deducted from the adjusted gross income would be $3000 or $1500 if married filing jointly. Thus a maximum amount of $3000 should be included on this line. But this would apply only if you are starting from the adjusted gross income amount and adjusting an amount back into the AGI amount. So here in the form no amount should be included.

Let's take number 6F. Here the amounts deducted for depreciation must be reinserted. Since the depreciation amounts are artificial then no depreciation of allowances for a reduction in the value of an asset should be included. This is or will be tedious work. Schedule E, F, and Form 4797 and K-1s will need to be adjusted to reflect the depreciation amount which needs to be added back in to correctly determine the disposable income. The cautionary note here is remember not to have the losses from business recalculated so the business income is too high. If you have a business loss take out the depreciation numbers first and then add back in the negative business income to the adjusted gross income amount. If done correctly and the form is correct then you should come up with a number correctly reflecting the RCWs intensions. Remember you are looking for "disposable income".

After 6G. Unfortunately no reference is being given here for input of the adjustments to income. In (5) from (5)(a-i) these amounts are referring to gross income and no addition or subtraction is being referred to for adjustments to income. The premise must be to look at and include amounts for adjustments and not just to look at gross income. The RCW clearly is trying to look at AGI and not Gross Income.

Let's take number 6H. Any other income. If just looking at the adjusted gross income this line can be deceptive. If one has a NOL or Net Operating Loss this amount can be a few dollars from prior years carryforward or millions of dollars which would generate no adjusted gross income. I would assume you would have according to the RCW already subtracted out from (5)(b) this amount - amounts deducted for loss. Truly this line is incorrect from the RCW. A separate reference should be for NOLs and other types of income. This would schew the real disposable income but have to go by what the RCW is directly referring to.

So here the form is incorrect. Truly it must be looking at and redesigned for calculating the correct RCW disposable income as relating to the RCW adjusted gross income.

"Disposable income" is usually a term referring to Cash Accounting. What you have converted to cash and received back from sources. You have direct control of these amounts and they have actually flowed through your hands. However, cash accounting is not what is being referred to here but the forms and worksheets are intermingling disposable income and cash accounting and not referring to the adjusted gross income reference which the RCW is requiring to do. Perhaps a further and finer look is needed for this.

Let's know look at the King County form and see if it conforms with the RCW. If it does not then I am going to assume that all other counties are incorrect and a statewide form recall needs to be done. Are we to go back four years and revisit this form for correctness or further. This could cost our Washington State budget and county and city budgets to be drastically reduce. But really who was supposed to get the relief anyways. The state, city, counties or the senior/disable citizens.

Let's look at King County form (*3).

Here the differences do not seem to be too much different than Snohomish County but rather the same.

Line 2. Same argument as 6B above.

Line 3. Consulting fees should also have self-employment tax attached which would be showing in the adjustment part. Notice no adjustments are included in this form also.

Line 4, 7, 8. Here no reference is being given to subtract out depreciation amounts. This would increase the disposable income on these lines. A greater use of expensing capital assets for small and deminimus amounts will be used by small businesses and rentals to be able include these small items as expenses rather than having to depreciate an assets.

Line 9. Capital gains. This should state unless you have a loss.

Line 10. All other income. Refer up to 6H again. Same argument.

No reference is being given here to include the adjustments of income. The form clearly is asking for the gross income with adjustments and the rest of the AGI or adjustments need to be included.

Line 13. For both King and Snohomish County I know am referring to (4)(a) I need you to look at the work "authorized" and "to issue prescriptions". The federal government does not authorize Canadian Prescriptions to be dispensed or to issue and thus all prescriptions transported south to this State or another state are not to be included in line 13 for King County or line 6(5) of Snohomish County. (*4 see (4)(a)).

Sources:
*1) http://www.bing.com/search?mkt=en-us&q=snoh-64-0002&FORM=TOOLBR
Snohomish County Senior Citizen and Disabled Persons Exemption from Real Property Taxes.

*2) http://apps.leg.wa.gov/RCW/default.aspx?cite=84.36.383
(5) "Disposable income" means adjusted gross income as defined in the federal internal revenue code, as amended prior to January 1, 1989, or such subsequent date as the director may provide by rule consistent with the purpose of this section, plus all of the following items to the extent they are not included in or have been deducted from adjusted gross income:

(a) Capital gains, other than gain excluded from income under section 121 of the federal internal revenue code to the extent it is reinvested in a new principal residence;
(b) Amounts deducted for loss;
(c) Amounts deducted for depreciation;
(d) Pension and annuity receipts;
(e) Military pay and benefits other than attendant-care and medical-aid payments;
(f) Veterans benefits, other than:
(i) Attendant-care payments;
(ii) Medical-aid payments;
(iii) Disability compensation, as defined in Title 38, part 3, section 3.4 of the code of federal regulations, as of January 1, 2008; and
(iv) Dependency and indemnity compensation, as defined in Title 38, part 3, section 3.5 of the code of federal regulations, as of January 1, 2008;
(g) Federal social security act and railroad retirement benefits;
(h) Dividend receipts; and
(i) Interest received on state and municipal bonds.
(6) "Cotenant" means a person who resides with the person claiming the exemption and who has an ownership interest in the residence.
(7) "Disability" has the same meaning as provided in 42 U.S.C. Sec. 423(d)(1)(A) as amended prior to January 1, 2004, or such subsequent date as the director may provide by rule consistent with the purpose of this section.
2008 c 182 § 1; 2008 c 6 § 709; 2006 c 62 § 1; 2004 c 270 § 2; 1999 c 358 § 18; 1995 1st sp.s. c 8 § 2; 1994 sp.s. c 8 § 2; 1991 c 213 § 4; 1991 c 219 § 1; 1989 c 379 § 6; 1987 c 155 § 2; 1985 c 395 § 3; 1983 1st ex.s. c 11 § 4; 1980 c 185 § 5; 1979 ex.s. c 214 § 2; 1975 1st ex.s. c 291 § 15; 1974 ex.s. c 182 § 2.]
http://apps.leg.wa.gov/RCW/default.aspx?cite=84.36.383

*3)http://www.kingcounty.gov/Assessor/Forms.aspx#Senior
King County Senior Citizen and Disabled Persons Declaration to Defer Property Taxes.

*4) (4) "Combined disposable income" means the disposable income of the person claiming the exemption, plus the disposable income of his or her spouse or domestic partner, and the disposable income of each cotenant occupying the residence for the assessment year, less amounts paid by the person claiming the exemption or his or her spouse or domestic partner during the assessment year for:
(a) Drugs supplied by prescription of a medical practitioner authorized by the laws of this state or another jurisdiction to issue prescriptions;
http://apps.leg.wa.gov/RCW/default.aspx?cite=84.36.383