IRS Issues Proposed Regulations Clarifying Definition of Qualifying Relative

The IRS has issued proposed regulations that clarify how the income test for being a qualifying relative applies for taxable years 2018–2025. As background, the Code defines a dependent as a “qualifying child” or a “qualifying relative.” One requirement for being a qualifying relative is that the individual’s gross income is less than the exemption amount under Code § 151(d) (sometimes called the “income” or “support” test). However, the Tax Cuts and Jobs Act (see our Checkpoint article) effectively suspended personal exemptions under Code § 151 for taxable years 2018–2025 by reducing the personal exemption amount for those years to zero. In IRS Notice 2018-70, the IRS indicated that it would issue proposed regulations providing that the temporary reduction of the exemption amount to zero is not taken into account when applying the income test for being a qualifying relative. Instead, the Code § 151(d) exemption amount would be treated as $4,150 (adjusted for inflation) during the suspension. These proposed regulations would make that change—replacing language in previously proposed regulations (see our Checkpoint article)—and may be relied on in any open taxable year.

EBIA Comment: The income test for being a qualifying relative is disregarded under the modified dependent definition that applies for various benefit-related purposes, including when determining whether an individual is an employee’s tax dependent for health coverage purposes or a qualifying individual whose dependent care expenses can be reimbursed under a DCAP. However, it may be relevant for certain purposes—e.g., when determining whether an individual is an HSA-ineligible tax dependent. For more information, see EBIA’s Cafeteria Plans manual at Sections XI.E (“Who Is a Qualifying Relative Under Code § 152?”) and XXIV.G (“Care Must Be for a ‘Qualifying Individual’”). See also EBIA’s Consumer-Driven Health Care manual at Section IX.B (“An Individual Who Can Be Claimed as a Tax Dependent Is Not HSA-Eligible”), and EBIA’s Employee Benefits for Domestic Partners at Section XI.F (“Who Are Qualifying Relatives?”).

Contributing Editors: EBIA Staff.