Dependent Defined

Published date13 October 2020
Citation85 FR 64383
Record Number2020-20746
SectionRules and Regulations
CourtInternal Revenue Service
Federal Register, Volume 85 Issue 198 (Tuesday, October 13, 2020)
[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
                [Rules and Regulations]
                [Pages 64383-64386]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-20746]
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                DEPARTMENT OF THE TREASURY
                Internal Revenue Service
                26 CFR Part 1
                [TD 9913]
                RIN 1545-BP52
                Dependent Defined
                AGENCY: Internal Revenue Service (IRS), Treasury.
                ACTION: Final regulations.
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                SUMMARY: This document contains final regulations that clarify the
                definition of a ``qualifying relative'' for purposes of various
                provisions of the Internal Revenue Code (Code) for taxable years 2018
                through 2025. These regulations generally affect taxpayers who claim
                Federal income tax benefits that require a taxpayer to have a
                qualifying relative.
                DATES:
                 Effective Date: These regulations are effective on October 13,
                2020.
                 Applicability Date: Sections 1.24-1 and 1.152-2(b) of these
                regulations apply to taxable years beginning on or after October 13,
                2020. Section 1.152-2(e) of these regulations applies to taxable years
                ending after August 28, 2018, the date the Department of the Treasury
                (Treasury Department) and the IRS issued Notice 2018-70, 2018-38 I.R.B.
                441.
                FOR FURTHER INFORMATION CONTACT: Victoria J. Driscoll at (202) 317-4718
                (not a toll-free number).
                SUPPLEMENTARY INFORMATION:
                Background
                 This document contains amendments to the Income Tax Regulations (26
                CFR part 1) under sections 24 and 152 of the Code relating to statutory
                amendments enacted in Public Law 115-97, 131 Stat. 2054 (2017),
                commonly referred to as the Tax Cuts and Jobs Act (TCJA).
                 Section 152(a) generally defines a ``dependent'' as a ``qualifying
                child'' or a ``qualifying relative.'' The definition of a qualifying
                relative in section 152(d)(1) includes the requirement that the
                individual have gross income for the calendar year that is less than
                the ``exemption amount'' as defined in section 151(d) (exemption
                amount). Such an individual also must satisfy the requirement of
                section 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 (support test). As described in parts I through IV
                of this Background, these final regulations provide that, in
                determining whether an individual is a qualifying relative for
                [[Page 64384]]
                purposes of various provisions of the Code that refer to section 152 in
                years in which the exemption amount is zero, the section 151(d)
                exemption amount will be the inflation-adjusted section 152(d)(1)(B)
                exemption amount in the annual revenue procedure setting forth
                inflation-adjusted items that is published in the Internal Revenue
                Bulletin.
                I. Exemption Amount
                 Generally, section 151 allows a taxpayer to claim a deduction equal
                to the exemption amount for each of the taxpayer and his or her spouse,
                and for any dependents. Prior to the TCJA, section 151(d) provided for
                an exemption amount of $2,000 that was adjusted annually for inflation
                beginning with calendar year 1990. Before the enactment of the TCJA,
                the IRS had determined that the exemption amount for taxable year 2018
                was $4,150. Rev. Proc. 2017-58, 2017-45 I.R.B. 489, modified and
                superseded by Rev. Proc. 2018-18, 2018-10 I.R.B. 392.
                 Section 11041(a)(2) of the TCJA added section 151(d)(5) to provide
                special rules for taxable years 2018 through 2025 regarding the
                exemption amount. Section 151(d)(5)(A) provides that, for a taxable
                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. H.R. Rep. No. 115-
                466, at 202-204 (2017) (Conference Report). However, section
                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
                section 151 is allowed or allowable to a taxpayer, or whether a
                taxpayer is entitled to a deduction under section 151, for purposes of
                any other provision of the Code. The Conference Report states that this
                provision clarifies that the reduction of the personal exemption to
                zero ``should not alter the operation of those provisions of the Code
                which refer to a taxpayer allowed a deduction . . . under section
                151,'' including the child tax credit in section 24(a). Id. at 203
                n.16. For example, the definition of head of household in section
                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 section 2(b)(1)(A)(ii)
                includes a person who is a qualifying relative under section 152(d) if
                the taxpayer is entitled to a deduction under section 151 for the
                person for the taxable year.
                II. Support Test
                 The section 152(d)(1)(C) support test 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. Prior to the
                TCJA, payments of alimony or separate maintenance paid to a spouse or
                former spouse were not treated as support of a dependent provided by
                the payor spouse. Additionally, alimony and separate maintenance
                payments were deductible by the payor spouse and includible in income
                by the recipient spouse under sections 61(a)(8), 71(a), and 215(a) of
                the Code. Under section 71(c), child support payments were not treated
                as alimony includible in income.
                 Section 11051 of the TCJA repealed sections 61(a)(8), 71 and 215,
                and, in a conforming change, also repealed section 682 of the Code for
                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. Consistent with prior law, the TCJA provides
                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. To conform with the repeal of sections 71 and 682 by the
                TCJA, section 11051(b)(3)(B) of the TCJA amended section 152(d)(5) of
                the Code regarding the source of a qualifying relative's support by
                revising the language of section 152(d)(5) to eliminate references to
                former sections 71 and 682.
                III. Credit for Other Dependents
                 Section 11022(a) of the TCJA amended section 24 of the Code to
                create a $500 credit for certain dependents of a taxpayer other than a
                qualifying child described in section 24(c) for whom the child tax
                credit is allowed. 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 section 152(d).
                Section 24(h)(4)(A) and (C). Like the amendment to section 151(d)
                reducing the exemption amount to zero, this new credit applies for
                taxable years 2018 through 2025. The Conference Report explains that
                ``[t]he credit is further modified to temporarily provide for a $500
                nonrefundable credit for qualifying dependents other than qualifying
                children. The provision generally retains the present-law definition of
                dependent.'' H.R. Rep. No. 115-466, at 227.
                IV. Administrative Action
                 On August 28, 2018, the Treasury Department and the IRS issued
                Notice 2018-70. This notice announced the intent to issue proposed
                regulations providing that the reduction of the exemption amount to
                zero under section 151(d)(5)(A) for taxable years 2018 through 2025
                will not be taken into account in determining whether an individual
                meets the requirement of section 152(d)(1)(B) to be a qualifying
                relative. Notice 2018-70 also stated that, before the issuance of the
                proposed regulations described in the notice, a taxpayer may rely on
                the rules described in the notice.
                 On June 9, 2020, the Treasury Department and the IRS published a
                notice of proposed rulemaking (REG-118997-19) in the Federal Register
                (85 FR 35233) proposing regulations under sections 24 and 152 (proposed
                regulations). Consistent with Notice 2018-70, the proposed regulations
                provide that, in determining whether an individual is a qualifying
                relative for purposes of various provisions of the Code that refer to
                section 152 in taxable years in which the exemption amount is zero, the
                section 151(d) exemption amount will be the inflation-adjusted section
                152(d)(1)(B) exemption amount in the annual revenue procedure setting
                forth inflation-adjusted items that is published in the Internal
                Revenue Bulletin. Thus, the exemption amount to be used for this
                purpose is $4,150 for taxable year 2018 (section 3.24 of Rev. Proc.
                2017-58, 2017-45 I.R.B. 489, modified and superseded by Rev. Proc.
                2018-18, 2018-10 I.R.B. 392); $4,200 for taxable year 2019 (section
                3.25 of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for taxable
                year 2020 (section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).
                 Section 1.152-3(c)(3) and (d)(2) of the proposed regulations were
                proposed as changes to an earlier notice of proposed rulemaking (REG-
                137604-07) also providing rules regarding the definition of a dependent
                under section 152, which was published in the Federal Register (82 FR
                6370) on January 19, 2017 (January 2017 Proposed Regulations). Section
                1.152-3(d)(2) of the January 2017 Proposed Regulations, which have not
                yet been finalized, originally included references to sections 71 and
                682. Accordingly, the proposed regulations withdrew Sec. 1.152-3(d)(2)
                of the January 2017 Proposed Regulations and replaced it with a
                proposed rule to reflect the amendments to section 152(d)(5) discussed
                in part II of this Background.
                [[Page 64385]]
                Summary of Comments and Explanation of Provisions
                 The Treasury Department and the IRS received three comments in
                response to the proposed regulations through the Federal eRulemaking
                Portal. As no request for a public hearing was received, no hearing was
                held.
                 Although two of the comments received did not relate to the
                proposed regulations, the third comment generally asked for additional
                clarity regarding the definition of a qualifying relative. As described
                in the Background, these regulations implement specific changes to the
                law enacted in the TCJA, which did not modify the definition of
                qualifying relative in section 152(d) other than to make conforming
                changes to section 152(d)(5) to account for the repeal of sections 71
                and 682. When the January 2017 Proposed Regulations are finalized, they
                will provide additional clarity to the regulations under section 152
                and related provisions.
                 The third comment also suggested that, because the final
                regulations would not be published earlier than 2020, it was not
                necessary to reference the exemption amount for purposes of section 152
                for taxable years 2018 and 2019. Although these final regulations are
                being published in 2020, Sec. 1.152-2(e) of these final regulations
                applies to taxable years ending after August 28, 2018, the date the
                Treasury Department and the IRS issued Notice 2018-70, pursuant to
                section 7805(b)(1)(C). Further, the Treasury Department and the IRS
                determined it appropriate to clarify that, in defining qualifying
                relative for purposes other than determining the amount allowable as a
                deduction under section 151(a), the exemption amount is not zero, but
                is the inflation-adjusted section 152(d)(1)(B) exemption amount in the
                annual revenue procedure setting forth inflation-adjusted items that is
                published in the Internal Revenue Bulletin.
                 This document adopts the proposed regulations as final regulations
                with no substantive change. However, because Sec. 1.152-3(c)(3) and
                1.152-3(d)(2) of the proposed regulations originally were proposed as
                changes to provisions of the January 2017 Proposed Regulations, which
                have not yet been finalized, the proposed regulations have been
                redesignated in the final regulations to coordinate with the existing
                regulations. Specifically, proposed Sec. 1.152-3(c)(3)(i) and (ii) is
                finalized as new Sec. 1.152-2(e)(1) and (2) and proposed Sec. 1.152-
                3(d)(2) is finalized as Sec. 1.152-2(b). When the January 2017
                Proposed Regulations are finalized, the provisions again will be
                appropriately redesignated.
                 Therefore, the provisions of the proposed regulations are adopted
                without substantive change to: (1) Provide that the exemption amount,
                for purposes other than a deduction for a personal or dependency
                exemption under section 151, is $4,150 for taxable year 2018, and for
                taxable years 2019 through 2025, the exemption amount, as adjusted for
                inflation, is the section 152(d)(1)(B) exemption amount, as set forth
                in guidance published in the Internal Revenue Bulletin; and (2)
                describe certain payments to a payee spouse for purposes of the support
                test without references to repealed sections 71 and 682.
                 Finally, these regulations clarify an issue raised regarding a
                statutory cross reference in section 24(h)(4) to ``a qualifying child
                described in subsection (c).'' As was proposed in the proposed
                regulations, these regulations clarify in Sec. 1.24-1 that the
                statutory cross reference is a reference to section 24(c), rather than
                to section 152(c).
                Applicability Date
                 Section 7805(b)(1) of the Code generally provides that no
                temporary, proposed, or final regulation relating to the internal
                revenue laws may apply to any taxable period ending before the earliest
                of (A) the date on which the regulation is filed with the Federal
                Register, or (B) in the case of a final regulation, the date on which a
                proposed or temporary regulation to which the final regulation relates
                was filed with the Federal Register. However, section 7805(b)(1)(C)
                provides that a regulation may apply to a taxable period ending after
                the date on which any notice substantially describing the expected
                contents of a regulation is issued to the public.
                 Accordingly, Sec. Sec. 1.24-1 and 1.152-2(b) of these regulations
                apply to taxable years beginning on or after October 13, 2020. Section
                1.152-2(e) of these regulations applies to taxable years ending after
                August 28, 2018, the date the Treasury Department and the IRS issued
                Notice 2018-70.
                Special Analyses
                 These regulations are not subject to review under section 6(b) of
                Executive Order 12866, pursuant to the Memorandum of Agreement (April
                11, 2018) between the Treasury Department and the Office of Management
                and Budget, regarding the review of tax regulations.
                 Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
                is certified that these regulations will not have a significant
                economic impact on a substantial number of small entities. These
                regulations primarily affect individuals and therefore will not have a
                significant economic impact on a substantial number of small entities.
                Accordingly, the Secretary of the Treasury's delegate certifies that
                the rule will not have a significant economic impact on a substantial
                number of small entities.
                 Pursuant to section 7805(f), the proposed regulations preceding
                these regulations were submitted to the Office of the Chief Counsel for
                the Office of Advocacy of the Small Business Administration for comment
                on its impact on small business, and no comments were received.
                Drafting Information
                 The principal author of the final regulations is Victoria Driscoll
                of the Office of Associate Chief Counsel (Income Tax and Accounting).
                However, other personnel from the Treasury Department and the IRS
                participated in their development.
                Statement of Availability of IRS Documents
                 IRS notices and other guidance cited in this preamble are published
                in the Internal Revenue Bulletin (or Cumulative Bulletin) and are
                available from the Superintendent of Documents, U.S. Government
                Publishing Office, Washington, DC 20402, or by visiting the IRS website
                at http://www.irs.gov.
                List of Subjects in 26 CFR Part 1
                 Income taxes, Reporting and recordkeeping requirements.
                Adoption of Amendments to the Regulations
                 Accordingly, 26 CFR part 1 is amended as follows:
                PART 1--INCOME TAXES
                0
                Paragraph 1. The authority citation for part 1 continues to read, in
                part, as follows:
                 Authority: 26 U.S.C. 7805 * * *
                * * * * *
                0
                Par. 2. Section 1.24-1 is added to read as follows:
                Sec. 1.24-1 Partial credit allowed for certain other dependents.
                 (a) In general. For purposes of section 24(h)(4)(A), a taxpayer may
                be eligible to increase the credit determined under section 24(a) by
                $500 for a dependent of the taxpayer, as defined in section 152, other
                than a qualifying child described in section 24(c).
                [[Page 64386]]
                 (b) Applicability date. This section applies to taxable years
                beginning on or after October 13, 2020.
                0
                Par. 3. Section 1.152-2, is amended by:
                0
                1. Revising paragraph (b); and
                0
                2. Adding paragraph (e).
                 The revision and addition read as follows:
                Sec. 1.152-2 Rules relating to general definition of dependent.
                * * * * *
                 (b)(1) A payment to a spouse (payee spouse) of alimony or separate
                maintenance is not treated as a payment by the payor spouse for the
                support of any dependent. Similarly, the distribution of income of an
                estate or trust to a divorced or legally separated payee spouse is not
                treated as a payment by the payor spouse for the support of any
                dependent. The preceding sentence will not apply, however, to the
                extent that such a distribution is in satisfaction of the amount or
                portion of income that, by the terms of a divorce decree, a written
                separation agreement, or the trust instrument is fixed as payable for
                the support of the minor children of the payor spouse.
                 (2) Paragraph (b)(1) of this section applies to taxable years
                beginning on or after October 13, 2020.
                * * * * *
                 (e)(1) In defining a qualifying relative for taxable year 2018, the
                exemption amount in section 152(d)(1)(B) is $4,150. For taxable years
                2019 through 2025, the exemption amount, as adjusted for inflation, is
                set forth in annual guidance published in the Internal Revenue
                Bulletin. See Sec. 601.601(d)(2) of this chapter.
                 (2) Paragraph (e)(1) of this section applies to taxable years
                ending after August 28, 2018.
                Sunita Lough,
                Deputy Commissioner for Services and Enforcement.
                 Approved: September 8, 2020.
                David J. Kautter,
                Assistant Secretary of the Treasury (Tax Policy).
                [FR Doc. 2020-20746 Filed 10-9-20; 8:45 am]
                BILLING CODE 4830-01-P
                

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