Deemed personal exemption amount introduced for various tax benefits

The IRS on Tuesday announced that it plans to issue regulations providing that the reduction in the personal exemption amount to zero for tax years 2018 through 2025 will not be taken into account in determining whether a person is a qualifying relative under Sec. 152(d)(1)(B) (Notice 2018-70). Accordingly, in defining a qualifying relative for purposes of various provisions of the Code that refer to the definition of a dependent in Sec. 152, including for purposes of the new $500 credit for other dependents under Sec. 24(h)(4) and head-of-household filing status under Sec. 2(b), the exemption amount will be treated as $4,150 (adjusted for inflation).

The IRS explained that the legislative history of the law indicated that the reduction of the exemption amount for purposes of suspending the deduction for personal exemptions was not intended to substantively change other Code provisions that directly or indirectly refer to the exemption amount. If the reduction in the exemption amount were taken into account for all Code provisions, the IRS noted, virtually no individuals would qualify as qualifying relatives, effectively eliminating an entire category of dependents and greatly reducing the availability of the new $500 credit for other dependents and head-of-household filing status. The IRS stated that it did not believe Congress intended any of these results.

Therefore, the IRS intends to issue regulations providing that for purposes of defining who is a qualifying relative under the Code, the exemption amount will be $4,150, as adjusted for inflation. Taxpayers may rely on the treatment in the notice until the regulations are issued.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.