[Federal Register Volume 85, Number 111 (Tuesday, June 9, 2020)]
[Proposed Rules]
[Pages 35233-35236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10224]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-118997-19]
RIN 1545-BP52
Dependent Defined; Notice of Proposed Rulemaking and Partial
Withdrawal of Notice of Proposed Rulemaking
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; partial withdrawal of a notice
of proposed rulemaking.
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SUMMARY: This document contains proposed 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 proposed regulations generally affect taxpayers who
claim Federal income tax benefits that require a taxpayer to have a
qualifying relative. This document also withdraws a portion of the
proposed regulations published on January 19, 2017, addressing the
support test for a qualifying relative, and proposes replacement
language.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 24, 2020. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-118997-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR
(REG-118997-19), room 5203, Internal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Victoria J. Driscoll (202) 317-4718; concerning submissions of comments
and/or requests for a public hearing, Regina Johnson, (202) 317-5177
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On January 19, 2017, the Treasury Department and the IRS published
a notice of proposed rulemaking providing rules regarding the
definition of a dependent under section 152, which includes a
qualifying relative, in the Federal Register (82 FR 6370) (January 2017
Proposed Regulations). This document revises the January 2017 Proposed
Regulations by adding a paragraph to clarify the definition of a
``qualifying relative'' for taxable years 2018 through 2025, and
withdrawing and reproposing a rule in the January 2017 Proposed
Regulations regarding the support of a dependent under section 152.
I. Zero Exemption Amount
Generally, section 151 allows a taxpayer to claim deductions for
exemptions for the taxpayer and his or her spouse, and for any
dependents. Section 152(a) of the Code 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). Such an individual must also 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.
Before amendment by section 11041(a)(2) of Public Law 115-97, 131
Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act
(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 calendar 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 in section 151(d). Section 151(d)(5)(A) provides that,
for a taxable year beginning after December 31, 2017, and
[[Page 35234]]
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.
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.
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
qualifying relative if the taxpayer is entitled to a deduction under
section 151 for the person for the taxable year. As noted above,
taxpayers are allowed a deduction under section 151 for individuals who
are dependents as defined in section 152, including qualifying
relatives described in section 152(d).
On August 28, 2018, the Treasury Department and the IRS issued
Notice 2018-70, 2018-38 I.R.B. 441. 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.
Consistent with Notice 2018-70, these 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
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 is $4,150 for 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 2019 (section 3.25
of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for 2020
(section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).
II. Alimony and Separate Maintenance Payments
Prior to the TCJA, 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. 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.
To conform with the repeal of section 71, 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. As mentioned in part I of this
Background, section 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. 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. However, the TCJA
revised the language of section 152(d)(5) to eliminate references to
sections 71 and 682, which were repealed by the TCJA. Section 1.152-
3(d)(2) of the January 2017 Proposed Regulations originally included
references to sections 71 and 682. Accordingly, these proposed
regulations withdraw Sec. 1.152-3(d)(2) of the January 2017 Proposed
Regulations and replace it with proposed Sec. 1.152-3(d)(2) to reflect
these amendments to section 152(d)(5).
Explanation of Provisions
Section 151(d) provides for two different exemption amounts for
taxable years 2018 through 2025. For purposes of the deduction allowed
for a personal exemption or a dependency exemption, section
151(d)(5)(A) provides that the exemption amount is zero, thereby
effectively suspending the deduction. However, for purposes of applying
other provisions of the Code that reference that deduction, Congress
provided in section 151(d)(5)(B) that the reduction of the exemption
amount to zero is not to be taken into account. For purposes of those
other Code provisions, proposed Sec. 1.152-3(c)(3) provides that the
exemption amount instead should be $4,150 for 2018, and should be
adjusted for inflation for 2019 through 2025, as set forth in guidance
published in the Internal Revenue Bulletin. This interpretation accords
with section 151(d)(5), which suspends the deduction for a personal
exemption or a dependency exemption without substantively changing
other Code provisions that directly or indirectly reference the section
151(d) exemption amount.
This interpretation also is confirmed by the structure of several
Code provisions that necessitate a non-zero exemption amount in section
152(d)(1)(B). For example, to be a qualifying relative under section
152(d)(1)(B), an individual must have gross income that is ``less than
the exemption amount.'' If the exemption amount were zero, an
individual's gross income would have to be less than zero, a near
impossibility. Under such a reading, virtually no individual would meet
the definition of a qualifying relative. Thus, a zero-exemption amount
for this purpose would effectively render section 152(d)(1)(B)
inoperable and eliminate an entire category of dependents. The Treasury
Department and the IRS find no indication that Congress intended to
make such a significant change in such an indirect manner.
In addition, the new $500 credit under section 24(h)(4), also
enacted in the TCJA, likewise depends on a non-zero exemption amount
under section 152(d)(1)(B). Section 24(h)(4)(A) creates
[[Page 35235]]
a $500 credit available for each dependent of the taxpayer other than a
qualifying child for whom the child tax credit is allowed. This
provision references the definition of dependent in section 152, which
includes both qualifying relatives and qualifying children, and it was
understood at the time of enactment that this provision ``generally
retain[ed] the present-law definition of dependent.'' H.R. Rep. No.
115-466, at 227. However, if the exemption amount referenced in section
152(d)(1)(B) were treated as zero for this purpose, the entire category
of qualifying relatives would be effectively excised from the
definition of dependent. As a consequence, the $500 credit generally
would not be available for qualifying relatives, and the class of
individuals who could qualify a taxpayer for this credit would shrink
to only a limited category of qualifying children for whom the child
tax credit is not allowed. The Treasury Department and the IRS find no
indication that Congress intended for the suspension of the deduction
for a personal exemption or a dependency exemption to have such a broad
effect, or intended for the eligibility for the new $500 credit to be
so narrow.
Further, head of household filing status also depends on a non-zero
exemption amount under section 152(d)(1)(B). Under section 2(b)(1)(A),
an individual is considered a head of household if, among other
requirements, he or she maintains as his or her home a household for
either (i) a qualifying child, or (ii) any other person who is a
dependent of the taxpayer. Because the only dependents other than
qualifying children are qualifying relatives, a zero-exemption amount
under section 152(d)(1)(B), and the resulting near elimination of
qualifying relatives, would render the express provision for other
dependents in section 2(b)(1)(A)(ii) surplusage. It also would deny
head of household filing status to many individuals who previously
qualified for that filing status and otherwise would continue to
qualify. Again, the Treasury Department and the IRS find no indication
that Congress intended for the suspension of the deduction for a
personal exemption or a dependency exemption to have such a broad
effect.
Accordingly, consistent with the guidance provided in Notice 2018-
70, proposed Sec. 1.152-3(c)(3) provides that the reduction of the
exemption amount to zero in section 151(d)(5)(A) for taxable years 2018
through 2025 does not apply for purposes of the gross income limitation
in the definition of a qualifying relative in section 152(d)(1)(B).
These proposed regulations also withdraw and repropose Sec. 1.152-
3(d)(2) of the January 2017 Proposed Regulations. Reproposed Sec.
1.152-3(d)(2) is substantively the same as the proposed provision it
replaces, but the reproposed regulation describes the payment to the
spouse without references to repealed sections 71 and 682.
Finally, the proposed regulations clarify an issue raised regarding
a cross reference in section 24(h)(4) to ``a qualifying child described
in subsection (c).'' The proposed regulations clarify that the cross
reference is a reference to section 24(c), rather than to section
152(c).
Applicability Date
Section 1.152-3(c)(3) of these regulations is proposed to apply to
taxable years ending after August 28, 2018, the date the Treasury
Department and the IRS issued Notice 2018-70. See section
7805(b)(1)(C). Sections 1.24-1 and 1.152-3(d)(2) of these regulations
are proposed to apply to taxable years beginning on or after the date
the regulations are published as final regulations in the Federal
Register. Pending the issuance of the final regulations, taxpayers may
rely on these proposed regulations in any open taxable year.
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 Department of the Treasury and the Office of
Management and Budget, regarding the review of tax regulations.
Regulatory Flexibility Act
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 will not have a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business.
Comments and Requests for a Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
``ADDRESSES'' section. The Treasury Department and the IRS request
comments on all aspects of the proposed regulations. Any electronic
comments submitted, and to the extent practicable any paper comments
submitted, will be made available at www.regulations.gov or upon
request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal author of these proposed 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.
Partial Withdrawal of Proposed Regulations
Under the authority of 26 U.S.C. 7805, Sec. 1.152-3(d)(2) of the
notice of proposed rulemaking (REG-137604-07) published in the Federal
Register on January 19, 2017 (82 FR 6370) is withdrawn.
Proposed Amendments to the Regulations
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Accordingly, 26 CFR part 1 is proposed to be 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 * * *
* * * * *
[[Page 35236]]
0
Par. 2. Section 1.24-1 is added to read:
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).
(b) Applicability date. This section applies to taxable years
beginning on or after [date the Treasury Decision adopting these rules
is published in the Federal Register].
0
Par. 3. Section 1.152-3, as proposed to be revised by 82 FR 6370,
January 19, 2017, is amended by:
0
a. Adding paragraph (c)(3); and
0
b. Revising paragraph (d)(2).
The addition and revision read as follows:
Sec. 1.152-3 Qualifying relative.
* * * * *
(c) * * *
(3)(i) For tax year 2018, the exemption amount under section
152(d)(1)(B) is $4,150.
For tax 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.
(ii) Paragraph (c)(3)(i) of this section applies to taxable years
ending after August 28, 2018.
* * * * *
(d) * * *
(2) Certain income of a taxpayer's spouse. 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 shall 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.
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-10224 Filed 6-8-20; 8:45 am]
BILLING CODE 4830-01-P