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Reflecting WFTRA, IRS Rules Address the Definition of Dependent
Practical Law Legal Update w-005-4945 (Approx. 5 pages)
Reflecting WFTRA, IRS Rules Address the Definition of Dependent
by Practical Law Employee Benefits & Executive Compensation
| Published on 24 Jan 2017 • USA (National/Federal) |
The Internal Revenue Service (IRS) has issued proposed regulations that update the definition of dependent under the Internal Revenue Code to reflect the Working Families Tax Relief Act of 2004 (WFTRA) and the Fostering Connections to Success and Increasing Adoptions Act of 2008 (FCSIAA).
In guidance that may impact employer-sponsored benefits, the IRS has issued proposed regulations that:
- Address the definition of dependent under the Internal Revenue Code (Code).
- Reflect changes under the Working Families Tax Relief Act of 2004 (WFTRA) and the Fostering Connections to Success and Increasing Adoptions Act of 2008 (FCSIAA).
In general, the Code allows individuals to deduct an exemption amount for dependents, as defined under Code Section 152 (26 U.S.C. § 152). To be an individual's tax dependent, a child must be either a "qualifying child" or a "qualifying relative" under Code Section 152, as amended by WFTRA and later legislation.
Definitions of Qualifying Child and Qualifying Relative
Under WFTRA, a dependent is defined as either a qualifying child or qualifying relative. Code Section 152(c) defines a qualifying child as an individual who:
- Bears a certain relationship to the taxpayer (that is, the qualifying child relationship test).
- Has the same principal place of abode as the taxpayer for more than half of the taxable year (residency test).
- Is younger than the taxpayer and is under age 19 (age 24 if a full-time student, or any age if permanently and totally disabled) (age test).
- Does not provide more than half of the individual's own support (qualifying child support test).
- Does not file a joint return with a spouse except to claim a refund of estimated or withheld taxes (joint return test).
Code Section 152(d) defines a qualifying relative as an individual who:
- Bears a certain relationship to the taxpayer, including an individual who has the same principal place of abode as the taxpayer and is a member of the taxpayer's household for the taxable year (that is, the qualifying relative relationship test).
- Has gross income less than the exemption amount for the taxable year (gross income test).
- Receives more than half of the individual's support from the taxpayer (qualifying relative support test).
- Is not a qualifying child of any taxpayer (not-a-qualifying-child test).
Dependency Exemption
Reflecting changes under WFTRA, the proposed regulations move rules regarding the definition of dependent from the regulations under Code Section 151 to Section 152.
Relationship Test
Consistent with prior guidance (IRS Notice 2008-5), the proposed regulations also provide that an individual is not a person's qualifying child if that person is not required to file an income tax return (under Code Section 6012 (26 U.S.C. § 6012)), and either:
- Does not file an income tax return.
- Files an income tax return solely to claim a refund of estimated or withheld taxes.
The proposed regulations also address an interpretive question resulting from a WFTRA change that arguably limited the situations in which the dependency exemption could be claimed. Under the proposed regulations, any child who is legally adopted by a "person" (or any child placed with a person for legal adoption by that person) is treated as a child by blood of that person for purposes of the relationship test of Code Sections 152(c)(2) and 152(d)(2).
The proposed regulations also include WFTRA-related updates involving adopted and foster children.
Residency, Age, and Support Tests
For specified purposes involving the qualifying child and qualifying relative definitions, the proposed regulations define "principal place of abode" as a person's main home or dwelling where the person resides. A principal place of abode:
- Need not be the same physical location throughout the tax year.
- May consist of temporary lodging (for example, a homeless shelter or relief housing following a natural disaster).
Relatedly, the proposed regulations provide that a taxpayer and an individual have the same principal place of abode notwithstanding either person's temporary absence. The proposed regulations include examples of situations that may constitute temporary absences (for example, a nonpermanent failure to occupy an abode due to military service).
The proposed regulations also include detailed rules applicable to the residency test for a qualifying child.
Additional standards address the age test in the case of a qualifying child and the definition of "student."
Regarding support standards for the qualifying child and qualifying relative tests, the proposed regulations compare:
- The amount of support provided by an individual or taxpayer.
- The total amount of the individual's support from all sources.
Other rules address which items are and are not support under the qualifying child and qualifying relative standards (including the treatment of government payments and subsidies). For example, medical insurance premiums are treated as support, but life insurance premiums are not.
Children of Parents Who Are Divorced, Separated, or Living Apart
Under Code Section 152, a child is treated as a qualifying child or qualifying relative of a noncustodial parent for a year if (among other requirements) the custodial parent provides a written declaration to the noncustodial parent that the custodial parent will not claim the child as a dependent for any tax year that begins in that calendar year.
Under the proposed regulations, the noncustodial parent must attach a copy of this written declaration to an original or amended return. However, a written declaration attached to an amended return generally is not adequate if the custodial parent:
- Signed it after filing a return claiming a dependency exemption for the child for the year at issue.
- Has not filed an amended return to remove that claim to a dependency exemption.
Other Rules Addressed in the Proposed Regulations
Among other rules, the proposed regulations also provide an individual is not a dependent of a person if that person is not required to file an income tax return under Code Section 6012 and either:
- Does not file an income tax return.
- Files an income tax return only to claim a refund of estimated or withheld taxes.
Practical Impact
The Affordable Care Act (ACA) amended the Code to provide a tax exclusion for reimbursements and coverage (premium payments) for medical care under an employer-provided health plan to any employee's child through the end of the taxable year in which the child reaches age 26 (see Practice Note, Coverage for Adult Children to Age 26 Under the ACA). This rule applies regardless of whether the child is a dependent under the Code (that is, as a qualifying child or qualifying relative). However, the rules addressed in the IRS's 2017 proposed regulations may apply for plans that cover employees' children over age 26, for whom consideration of qualifying child or qualifying relative status is needed to evaluate the coverage's tax treatment.