[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