The Internal Revenue Service has issued proposed regulations that redefine the term “dependent” under the Internal Revenue Code. In particular, the proposed regulations implement the changes made to the Code (including the definition of dependent) by the Working Families Tax Relief Act of 2004 (“WFTRA”) and related legislation.
Background. The Code generally allows an individual taxpayer claim an exemption for dependents who have satisfied the requirements of Code Section 152.
WFTRA amended Code Section 152 so that a taxpayer may only claim a “qualifying child” or a “qualifying relative” as a dependent for federal tax purposes.
Code Section 152(c) defines a qualifying child as an individual who:
- Has a certain relationship to the taxpayer (i.e., the qualifying child relationship test).
- Has the same principle place of residence as the taxpayer for over half of the tax year (i.e., the residency test).
- Is younger than the taxpayer and under age 19 (i.e., the age test).
- Does not provide more than half of their own support (i.e., the support test).
- Does not file a joint return with a spouse except to claim a refund of estimated or withheld taxes.
Code Section 152(d) defines a qualifying relative as an individual who:
- Has a specified relationship with the taxpayer.
- Has gross income of less than the federal exemption amount for the tax year.
- Receives over half of their support from the taxpayer.
- Is not another taxpayer’s qualifying child.
In the context of employee benefit plans, the federal definition of dependent determines whether an individual (e.g., domestic partners, children over age 27) can receive employer-provided health insurance on a tax-free basis, and whether certain expenses related to child care are eligible for reimbursement from a dependent care flexible spending account.
IRS Regulations. Highlights from the proposed regulations include:
- Changes to the method for determining a taxpayer’s adjusted gross income under the “tiebreaker” rules when a child can be claimed by more than one taxpayer and the source of support of certain payments that originated as governmental payments.
- Guidance on the application the Code’s relationship, residency, age, support, and joint return tests for determining whether an individual is a taxpayer’s qualifying child.
- Clarification regarding dependent status determinations for students, children placed for adoption and foster children.
The proposed regulations are available at: https://www.gpo.gov/fdsys/pkg/FR-2017-01-19/pdf/2017-01056.pdf