Final regulations clarify qualifying relative gross income and support tests

Final regulations do not apply the zero exemption amount to the qualifying relative gross income test for 2018-2025 and clarify alimony rules for the support test.

September 24, 2020

The Treasury Department and IRS issued final regulations clarifying aspects of two qualifying relative tests, the gross income test and the support test, in view of changes made by the TCJA. The final regulations adopt with no substantive changes the guidance in proposed regulations issued earlier this year.

To claim a dependent or dependent-connected tax benefit, a taxpayer must have a qualifying child or qualifying relative. Among other requirements, a qualifying relative must have gross income for the year that is less than the exemption amount and must receive more than one half of his or her support from the taxpayer claiming the dependent.

Gross income test and the zero exemption amount

Under the TCJA, for tax years 2018 through 2025, the exemption amount is zero. As discussed earlier in the proposed regulations, since virtually no individual could have gross income that is less than zero, such a requirement would “eliminate an entire category of dependents.”

To avoid that possibility, the TCJA provides that the zero exemption amount is not taken into account to determine if a taxpayer is entitled to a §151 exemption deduction or for any other provision in the Code. The Conference Report to the TCJA notes that this provision is meant to clarify that the zero exemption “should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction…under section 151.”

Accordingly, under the final regulations for purposes of the qualifying relative gross income test the exemption amount is $4,150 for 2018. This amount is adjusted annually for inflation. The 2019 and 2020 amounts are $4,200 and $4,300 respectively.

Taxpayers may apply this guidance to determine if they have a dependent qualifying relative, for example, for the $500 credit for other dependents (ODC) under §24(h)(4), for head of household filing status under §2(b), and the premium tax credit under §36B.

Support test and alimony

Proposed regulations issued in 2017 (before the TCJA) stated that taxable alimony received by a payee spouse is not considered support provided by the payor spouse. Under the TCJA, for divorce instruments executed after 2018, alimony is not taxable to the payee spouse or deductible by the payor spouse.

The final regulations revised sections of the pre-TCJA proposed regulations to remove references to taxable alimony.

  • Alimony or separate maintenance payments to a payee spouse are not treated as dependent support provided by the payor spouse.
  • Likewise, a distribution from an estate or trust to a divorced or legally separated payee spouse is not treated as dependent support provided by the payor spouse.
  • A distribution from an estate or trust that is designated as support for the payor spouse’s minor children is treated as support provided by the payor spouse.

In most instances, dependents of divorced parents are claimed as qualifying children, so the qualifying relative support test does not come into play. The regulation could be relevant, for instance, for a divorce agreement involving a dependent adult child.

Effective date

The final regulations mainly serve to revise or expand earlier proposed and final regulations because of the TCJA and are generally effective when they are published in the Federal Register. However, Reg. §1.152-2(e)(1) pertaining to the qualifying relative gross income test is effective for tax years ending after August 28, 2018 (calendar year 2018 for most taxpayers).

(Originally published in the 9/17/20 edition of TAX in the News; an update to an article published 6/17/20)

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