IRS Finalizes Regs Clarifying the Definition of Qualifying Relative for Years 2018-2025

(Parker Tax Publishing October 2020)

The IRS issued final regulations that clarify the definition of a qualifying relative under Code Sec. 152(d)(1) for purposes of various Code provisions for years 2018 through 2025. The final regulations provide that, in determining whether an individual is a qualifying relative for purposes of various provisions of the Code that refer to Code Sec. 152 in years in which the exemption amount in Code Sec. 151(d) is zero, the exemption amount is the Code Sec. 152(d)(1)(B) inflation-adjusted exemption amount in the annual revenue procedure setting forth inflation-adjusted items. T.D. 9913.

Background

Generally, Code Sec. 151 allows a taxpayer to claim exemption deductions for the taxpayer and his or her spouse, and for any dependents. Under Code Sec. 152(a), a dependent means either a qualifying child or a qualifying relative. The definition of a "qualifying relative" in Code Sec. 152(d)(1) includes the requirement in Code Sec. 152(d)(1)(B) that the individual have gross income for the calendar year that is less than the exemption amount as defined in Code Sec. 151(d). Such an individual must also satisfy the requirement of Code Sec. 152(d)(1)(C) that the individual receive more than one-half of his or her support from the taxpayer claiming the individual as a qualifying relative.

Before being amended by the Tax Cuts and Jobs Act (TCJA), Code Sec. 151(d) provided for an exemption amount of $2,000 that was adjusted annually for inflation. Before the enactment of TCJA, the IRS had determined in Rev. Proc. 2017-58 (modified and superseded by Rev. Proc. 2018-18) that the exemption amount for calendar year 2018 was $4,150. TCJA added Code Sec. 151(d)(5) to provide special rules for tax years 2018 through 2025 regarding the exemption amount in Code Sec. 151(d). Code Sec. 151(d)(5)(A) provides that, for a tax year beginning after December 31, 2017, and before January 1, 2026, the exemption amount is zero, thereby suspending the deductions for personal exemptions and the dependency exemption. However, Code Sec. 151(d)(5)(B) provides that the reduction of the exemption amount to zero is not taken into account in determining whether a deduction under Code Sec. 151 is allowed or allowable to a taxpayer, or whether a taxpayer is entitled to a deduction under Code Sec. 151, for purposes of any other provision of the Code.

TCJA also amended Code Sec. 24 to create a $500 credit for certain dependents of a taxpayer other than a qualifying child described in Code Sec. 24(c) for whom the child tax credit is allowed. Under Code Sec. 24(h)(4), the $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relatives as defined in Code Sec. 152(d). This new credit applies for tax years 2018 through 2025.

The definition of "head of household" in Code Sec. 2(b)(1)(A) includes the requirement that the taxpayer maintain as his or her home a household for a qualifying individual for a specified 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 such person for the tax year. As noted above, taxpayers are allowed a deduction under Code Sec. 151 for individuals who are dependents as defined in Code Sec. 152, including qualifying relatives described in Code Sec. 152(d).

Before the enactment of TCJA, alimony and separate maintenance payments were deductible by the payor spouse and includible in income by the recipient spouse under Code Secs. 61(a)(8), 71(a), and 215(a). Under Code Sec. 71(c), child support payments were not treated as alimony. TCJA repealed Code Secs. 61(a)(8), 71 and 215, and, in a conforming change, also repealed Code Sec. 682, relating to amounts included in the income of an estate or trust in case of divorce. The repeal of Code Sec. 682 applies to any divorce or separation instrument executed after 2018, and for any instrument executed before 2019 and later modified to apply the provisions of the TCJA. To conform with the repeal of Code Sec. 71, TCJA amended Code Sec. 152(d)(5) regarding the source of a qualifying relative's support. As previously mentioned, Code Sec. 152(d)(1)(C) requires that an individual receive more than one-half of his or her support from the taxpayer to be claimed as a qualifying relative of that taxpayer. TCJA provides, consistent with prior law, that payments of alimony or separate maintenance paid to a spouse or former spouse are not treated as support of a dependent provided by the payor spouse. However, TCJA revised the language of Code Sec. 152(d)(5) to eliminate references to Code Sec. 71 and Code Sec. 682, which were repealed by the TCJA.

On August 28, 2018, the IRS issued Notice 2018-70 to announce its intent to issue proposed regulations providing that the reduction of the exemption amount to zero under Code Sec. 151(d)(5)(A) for tax years 2018 through 2025 will not be taken into account in determining whether an individual meets the requirement of Code Sec. 152(d)(1)(B) to be a qualifying relative. In June of 2020, the IRS published proposed regulations (REG-118997-19) providing, consistent with Notice 2018-70, that in determining whether an individual is a qualifying relative for purposes of various provisions of the Code that refer to Code Sec. 152 in years in which the exemption amount is zero, the Code Sec. 151(d) exemption amount will be the inflation-adjusted Code Sec. 152(d)(1)(B) exemption amount in the annual revenue procedure setting forth inflation-adjusted items. The proposed regulations also modified earlier proposed regulations (REG-137604-07) that provided rules regarding the definition of a dependent under Code Sec. 152, and included references to repealed Code Sec. 71 and Code Sec. 682.

Final Regulations

Last week, the IRS finalized the proposed regulations issued in REG-118997-19 with no substantive change. The final regulations provide that the exemption amount, for purposes other than a deduction for a personal or dependency exemption under Code Sec. 151, is $4,150 for tax year 2018, and for tax years 2019 through 2025, the exemption amount, as adjusted for inflation, is the Code Sec. 152(d)(1)(B) exemption amount, as set forth in guidance published in the Internal Revenue Bulletin.

Observation: The exemption amount is $4,200 for 2019 (Rev. Proc. 2018-57); and $4,300 for 2020 (Rev. Proc. 2019-44).

The final regulations also describe certain payments to a payee spouse for purposes of the support test without references to repealed Code Sec. 71 and repealed Code Sec. 682. Finally, the final regulations clarify an issue regarding a statutory cross reference in Code Sec. 24(h)(4) to "a qualifying child described in subsection (c)." As was proposed in the proposed regulations, the final regulations clarify in Reg. Sec. 1.24-1 that the statutory cross reference is a reference to Code Sec. 24(c), rather than to Code Sec. 152(c).

For additional discussion of claiming dependency exemptions, see Parker Tax ¶10,720. For a discussion of the child tax credit, see Parker Tax ¶100,701.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com