Source: https://www.currentfederaltaxdevelopments.com/blog/2018/8/30/irs-clarifies-how-change-in-exemption-amount-affects-definition-of-qualifying-relative
Timestamp: 2019-08-26 00:54:31
Document Index: 737979582

Matched Legal Cases: ['§151', '§151', '§ 152', '§ 152', '§ 151', '§ 152', '§ 152', '§152']

IRS Clarifies How Change in Exemption Amount Affects Definition of Qualifying Relative — Current Federal Tax Developments
IRS Clarifies How Change in Exemption Amount Affects Definition of Qualifying Relative
August 30, 2018 by Ed Zollars, CPA
The IRS has issued Notice 2018-70 to clarify the definition of a qualifying relative and exemption amount following changes made in the Tax Cuts and Jobs Act.
Under the Tax Cuts and Jobs Act, exemptions for dependents are set to zero beginning in 2018 by IRC §151(d)(5). However, in IRC §151(d)(5)(B) provides that:
The Notice provides guidance on how to apply this provision to a number of provisions tied to the definition of a qualifying relative. The Notice provides:
The IRS notes that a contrary reading of the statute leads to results that are absurd:
For example, to be a qualifying relative under § 152(d)(1)(B), an individual must have gross income that is “less than the exemption amount.” But if the exemption amount were zero, an individual's gross income would have to be less than zero — a near impossibility. And because it would be highly unusual for an individual to have gross income less than zero,1 virtually no individuals would be eligible as qualifying relatives. A zero exemption amount would thus effectively render § 152(d)(1)(B) inoperable and eliminate an entire category of dependents. The Treasury Department and IRS do not believe Congress intended to make such a significant change in such an indirect manner.
In addition, the new $500 credit that Congress enacted at the same time, and in the same Act, as it reduced the § 151(d) exemption amount likewise depends on a non-zero exemption amount in § 152(d)(1)(B). Section 24(h)(4)(A), as amended, creates 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. But if the exemption amount referenced in § 152(d)(1)(B) were zero, 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 availability of this credit would shrink to only a limited category of qualifying children for whom the child tax credit is not allowed. This does not appear to be what Congress intended when it enacted the new $500 credit.
Under the terms of this Notice, the reduction of the exemption amount to zero will not apply for purposes of determining if an individual is a qualifying relative under IRC §152(d)(1)(B). Rather, the exemption amount will be deemed to be $4,150 (adjusted for inflation) for years when the exemption amount is set to zero.[1]
[1] Notice 2018-70, Section 3
August 30, 2018 /Ed Zollars, CPA