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Tax Cuts and Jobs Act

IRS clarifies definition of “qualifying relative” in light of TCJA changes

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Notice 2018-70, 2018-38 IRB

In a Notice, IRS has issued guidance, and announced its intention to issue proposed regs, clarifying the definition of “qualifying relative” in Code Sec. 152(d) for purposes of various provisions of the Code, including the new $500 credit for other dependents under Code Sec. 24(h)(4) and head of household filing status under Code Sec. 2(b), for tax years in which the Tax Cuts and Jobs Act (TCJA) provides that the Code Sec. 151(d) exemption amount is zero.

Background. Code Sec. 151(a) allows a taxpayer to claim deductions for exemptions for the taxpayer and his or her spouse (Code Sec. 151(b)), and for any dependents (Code Sec. 151(c)). Before it was amended by the TCJA (PL 115-97, 12/22/2017), Code Sec. 151(d)provided for an exemption amount of a base dollar amount that was adjusted for inflation. Before the TCJA, the exemption amount for 2018 was calculated to be $4,150.  (Rev Proc 2018-18, 2018-10 IRB 392)

Code Sec. 152(a) defines a “dependent” to include a “qualifying relative.” One of the qualifications for a person being a qualifying relative is that his gross income for the calendar year in which the taxpayer’s tax year begins is less than the exemption amount (as defined in Code Sec. 151(d)).

Section 11041(a)(2) of the TCJA added Code Sec. 151(d)(5) to provide special rules for tax years 2018 through 2025 for the exemption amount in Code Sec. 151(d). Specifically, Code Sec. 151(d)(5)(A) provides that, for a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, the term “exemption amount” is zero. However, Code Sec. 151(d)(5)(B) provides that, for purposes of any other provision of the Code, the reduction of the exemption amount to zero will not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under Code Sec. 151.

Code Sec. 24(h)(4) provides a $500 credit for certain dependents of a taxpayer, including qualifying relatives as defined in Code Sec. 152(d).   Like the amendment to Code Sec. 151(d) reducing the exemption amount to zero, this new credit applies for tax years 2018 through 2025. The Conference Report for the TCJA provides “The provision generally retains the present-law definition of dependent.” See H.R. Rep. No. 115-466 at 227 (emphasis added).

Code Sec. 2(b)(1)(A) defines a head of household to include an individual who is not married at the close of the tax year, who is not a surviving spouse (as defined in Code Sec. 2(a)), and who maintains as his or her home a household for a qualifying individual for the required period of time. A qualifying individual under Code Sec. 2(b)(1)(A)(ii) includes a qualifying relative if the taxpayer is entitled to a deduction under Code Sec. 151 for the person for the tax year.

IRS sets out definition of qualifying relative.  In the Notice, IRS has announced that it intends to issue proposed regs providing that the reduction of the exemption amount to zero under Code Sec. 151(d)(5)(A) for tax years 2018-2025 will not be taken into account in determining whether a person is a qualifying relative under Code Sec. 152(d)(1)(B). Accordingly, in defining a qualifying relative for purposes of various provisions of the Code that refer to the definition of dependent in Code Sec. 152, including, without limitation, for purposes of the new credit under Code Sec. 24(h)(4) and head of household filing status under Code Sec. 2(b), the Code Sec. 151(d) exemption amount referenced in Code Sec. 152(d)(1)(B) will be treated as $4,150 (adjusted for inflation), for tax years in which the Code Sec. 151(d)(5)(A) exemption amount is zero.

IRS notes that this interpretation accords with Code Sec. 151(d)(5), which aims to suspend the deduction for personal exemptions without substantively changing other Code provisions that directly or indirectly reference the Code Sec. 151(d) exemption amount.

Reliance.  Before the issuance of the proposed regs, taxpayers may rely on the rules described above.

References: For qualifying relatives, see FTC 2d/FIN ¶ A-3605.6United States Tax Reporter ¶ 1524.

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