IRS Releases Proposed Updates to the Dependency Exemption Rules and Other Tax Benefits

Proposed regulations have been issued by the IRS updating the dependency exemption rules. These proposed regulations build on the dependency requirements previously amended by the Working Families Tax Relief Act of 2004, as well as the Fostering Connections to Success and Increasing Adoptions Act.

These acts amended the dependency requirements by establishing a uniform definition of a “qualifying child,” which includes four tests that must all be met:

• Relationship – includes a taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of any of the aforementioned.
• Residence – must have the same principal residence as the taxpayer for more than half of the tax year (exceptions do apply).
• Age – must be under age 19 at the end of the tax year, or under age 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
• Support – did not provide more than one-half of his/her own support for the year.

The acts further amended the requirements of a qualifying child, indicating that the child must be younger than the taxpayer and must not file a joint return. The act also added “tiebreaker” rules that apply when two or more taxpayers are able to claim an individual as a qualifying child. Usually, the individual with the higher adjusted gross income will claim the dependent.

The recently issued proposed regulations target certain areas of the dependency rules that were previously modified. The proposed regulations:

1. Include further explanation regarding the relationship, as defined above, stating that an individual is not a qualifying child of a person if that person is not required to file an income tax return and does not file a tax return, or only files a tax return to claim a refund of estimated or withheld taxes.
2. Provide a definition of “principal place of abode” and “temporary absence” as required for the residency test indicated above.
3. Provide a definition of “student” which falls under the age test indicated above.
4. Provide a definition of “support” as required for the support test indicated above.
5. Discuss treatment of non-citizen adopted children and how they may qualify as dependents.
6. Provide a definition of adjusted gross income on a joint return in determining tiebreaker rules.
7. Address tax return attachments required for noncustodial parents claiming a dependency exemption.

In addition to the updates to the dependency exemption rules, there are other key tax benefit changes included in the proposed regulations, as follows:

1. Head of household filing status and the definition of “maintaining a household.”
2. An additional standard deduction for the aged and blind and removing the current additional exemption.
3. Issuing tax ID numbers for children placed for adoption.
4. Earned income tax credit claims for childless taxpayers.

Taxpayers can apply the proposed regulations to any open tax years. The proposed changes will become effective for tax years beginning after the date the regulations are finalized. For more information on the changes to the dependency exemption and other tax benefit changes noted above, please contact your Marcum tax advisor.