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Individual Tax

IRS clarifies effect of suspending personal exemption deductions on certain healthcare provisions

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Notice 2018-84, 2018-45 IRB

In a Notice, IRS has provided interim guidance clarifying how the suspension of the personal exemption deduction in Code Sec. 151(d)(5) applies to certain rules under Code Sec. 36B and Code Sec. 6011 (relating to the premium tax credit) and under Code Sec. 5000A (relating to the individual shared responsibility provision, also known as the individual mandate). IRS also announced its intent to amend the regs under Code Sec. 36B and Code Sec. 6011 to clarify the application of Code Sec. 151(d)(5), but that the guidance in the Notice applies until those regs are issued.

Background—suspension of personal exemption deductions. For tax years before 2018 and after 2025, Code Sec. 151 generally allows a taxpayer to claim a personal exemption deduction for the taxpayer, the taxpayer’s spouse, and any dependents, based on the exemption amount defined in Code Sec. 151(d).

From 2018 through 2025, Code Sec. 151(d)(5), as added by the Tax Cuts and Jobs Act (P.L. 115-97, 12/22/2017), provides that the term “exemption amount” means zero, effectively suspending personal exemption deductions. However, Code Sec. 151(d)(5)(B) provides that the reduction of the exemption amount to zero “shall not be taken into account in determining whether a [personal exemption] deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction under this section.” As explained by the Conference Report, the reduction to zero “should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction (or an individual with respect to whom a taxpayer is allowed a deduction)” under Code Sec. 151.

Background—healthcare rules that incorporate Sec. 151.  Code Sec. 36B allows a premium tax credit to eligible individuals who enroll themselves, their spouse, or any dependent (as defined in Code Sec. 152) in a qualified health plan through an Exchange, and Code Sec. 6011 provides general rules related to income tax return filing requirements.

The regs under Code Sec. 36B and Code Sec. 6011 include rules that apply based on whether a taxpayer claims or claimed a personal exemption deduction under Code Sec. 151 for an individual. These rules affect eligibility for the premium tax credit, computation of the premium tax credit, reconciliation of advance payments of the premium tax credit, and income tax return filing requirements related to the premium tax credit.

Beginning in 2014 and continuing through 2018 (after which time the TCJA reduced the penalty amount to zero), under Code Sec. 5000A, if a taxpayer or an individual for whom the taxpayer is liable isn’t covered under minimum essential coverage for one or more months, then, unless an exemption applies, the taxpayer is liable for the individual shared responsibility payment (penalty) on his or her return.

The regs under Code Sec. 5000A include rules that apply based on whether a taxpayer claims or claimed a personal exemption deduction under Code Sec. 151 for an individual. For example, Reg. § 1.5000A-3(e)(3)(ii)(B)) refers to “an individual for whom a personal exemption deduction… is claimed.”

Interim guidance. In Notice 2018-84, IRS announced that it intends to amend the regs under Code Sec. 36B and Code Sec. 6011 to clarify the application of Code Sec. 151(d)(5). No regs will be issued under Code Sec. 5000A since the individual shared responsibility payment is reduced to zero after 2018.

Until these regs are amended, the guidance provided in Notice 2018-84 applies for purposes of the regs under Code Sec. 36B and Code Sec. 5000A and for purposes of Reg. § 1.6011-8(a):

  1. A taxpayer is considered to have claimed a personal exemption deduction for himself or herself for a tax year if the taxpayer files an income tax return for the year and does not qualify as a dependent of another taxpayer under Code Sec. 152 for the year;
  2. A taxpayer is considered to have claimed a personal exemption deduction for an individual other than the taxpayer if the taxpayer is allowed a personal exemption deduction for the individual (taking into account Code Sec. 151(d)(5)(B)) and lists the individual’s name and taxpayer identification number (TIN) on the Form 1040, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Income Tax Return, the taxpayer files for the year.

Effective/applicability date.  Notice 2018-84 applies to tax years beginning in 2018.

References: For the premium tax credit, see FTC 2d/FIN ¶ A-4241United States Tax Reporter ¶ 36B4. For the penalty for failure to maintain health insurance coverage, see FTC 2d/FIN ¶ V-3900United States Tax Reporter ¶ 50,00A4.2.

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