IRS Issues Final Regulations Clarifying Definition of Qualifying Relative

The IRS has issued final regulations that clarify how the income test for being a qualifying relative applies for taxable years 2018–2025. As background, the Code defines a dependent as a “qualifying child” or a “qualifying relative.” One requirement for being a qualifying relative is that the individual’s gross income must be less than the exemption amount under Code § 151(d) (sometimes called the “income” test). However, the Tax Cuts and Jobs Act (see our Checkpoint article) reduced the personal exemption amount under Code § 151 to zero for taxable years 2018–2025, effectively suspending personal exemptions for those years. In IRS Notice 2018-70, the IRS indicated that it would issue regulations providing that the temporary reduction of the exemption amount to zero is not taken into account when applying the income test for being a qualifying relative. Instead, during the suspension, the Code § 151(d) exemption amount would be treated as $4,150 (adjusted for inflation). Earlier this year, the IRS proposed regulations that would make that change (see our Checkpoint article). Those regulations have now been issued in final form with no substantive changes from the proposal.

EBIA Comment: Many benefit-related rules use a modified dependent definition that disregards the income test for being a qualifying relative. Examples include the rules for determining whether an individual is an employee’s tax dependent for health coverage purposes or a qualifying individual whose dependent care expenses can be reimbursed under a DCAP. However, the income test may be relevant for certain purposes—e.g., when determining whether an individual is an HSA-ineligible tax dependent. For more information, see EBIA’s Cafeteria Plans manual at Sections XI.E (“Who Is a Qualifying Relative Under Code § 152?”) and XXIV.G (“Care Must Be for a ‘Qualifying Individual’”). See also EBIA’s Consumer-Driven Health Care manual at Section IX.B (“An Individual Who Can Be Claimed as a Tax Dependent Is Not HSA-Eligible”), and EBIA’s Employee Benefits for Domestic Partners at Section XI.F (“Who Are Qualifying Relatives?”).

Contributing Editors: EBIA Staff.