IRS rules defining dependents and EITC qualification are to be amended

Editor: Sally P. Schreiber, J.D.

The IRS proposed changing its position on when taxpayers may qualify as childless for purposes of the Sec. 32 earned income tax credit (REG-137604-07). The proposed regulations, issued on Jan. 19, would also make a variety of changes to the definition of “dependent” in the regulations to reflect various statutory changes that have been made to the dependency exemption. Finally, the proposed regulations would amend various regulations on the surviving spouse and head-of-household filing statuses, the tax tables for individuals, the child and dependent care credit, the earned income tax credit (EITC), the standard deduction, joint tax returns, and taxpayer identification numbers (TINs) for children placed for adoption to reflect current law.

The IRS also withdrew old proposed regulations (REG-107279-00) that were issued in 2000, before changes made by the Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311. That act amended Sec. 152 to provide that a child lawfully placed with a taxpayer for adoption can qualify as a dependent. Prop. Regs. Sec. 1.152-2(c)(2), promulgated in REG-107279-00, reflected prior law and is withdrawn.

Earned income tax credit

Since 1994, childless taxpayers have been able to claim a reduced EITC if they meet certain requirements. However, since 1995, the IRS has taken the position that if a child meets the definition of “qualifying child” for more than one taxpayer, then the taxpayer for whom the child is not treated as a qualifying child under the tiebreaker rules cannot claim the EITC for childless taxpayers.

Under the proposed regulations, this position would change. The proposed regulations would provide that, if a child meets the definition of “qualifying child” for more than one taxpayer, and the child is not treated as a qualifying child of one of the taxpayers under the tiebreaker rules, then the child is also not treated as a qualifying child for purposes of the EITC. Therefore, if otherwise eligible, that taxpayer could claim the EITC for childless taxpayers.

Dependency rules

The proposed regulations would update the regulations to address several aspects of the dependency rules that were modified by WFTRA. These include:

1. The Sec. 152(c)(2) relationship test;
2. The definition of “principal place of abode” and “temporary absence” for purposes of the residency test;
3. The definition of “student” for the age test;
4. The definition of “support” for the support test;
5. The treatment of noncitizen adopted children;
6. The calculation of adjusted gross income on a joint return for purposes of the Sec. 152(c)(4) tiebreaker rules;
7. The requirements for noncustodial parents who claim a dependency exemption; and
8. The rule from Notice 2008-5 that an individual is not a qualifying child of a person if that person is not required to file a return under Sec. 6012 and either does not file a return or files a return solely to obtain a refund.

WFTRA amended Sec. 152(f)(1)(B) to provide that a legally adopted individual of a “taxpayer” is treated as a child by blood of the taxpayer (formerly this provision referred to “individual” rather than “taxpayer”). The IRS recognizes that the use of the word “taxpayer” in this section may limit the recognition of relationships through adoption to only those situations where the taxpayer claiming the dependency exemption is the person who adopted the child. The IRS notes that this would make the results of legal adoption under tax law different from that under nontax law, and the IRS believes Congress did not intend to limit the treatment of adopted children in this way. Therefore, the proposed regulations would substitute “person” for “taxpayer” in this situation so that any child 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 Secs. 152(c) and (d) relationship tests.

Surviving spouse and head of household

The proposed regulations would remove from regulations references to the treatment of tax returns of surviving spouses as joint returns, reflecting amendments made by WFTRA.

They would also amend the definition of “maintaining a household” and move it from the regulations under Sec. 21 to the regulations under Sec. 2 to reflect the WFTRA amendment that removed the requirement that a taxpayer maintain a household in order to claim the dependent care credit.

Additional standard deduction for the aged and blind

The proposed regulations would remove the provisions for additional exemptions for age and blindness from under Sec. 151 and add them under Sec. 63, to reflect changes made by the Tax Reform Act of 1986, P.L. 99-514.

Effective date

The proposed changes would apply to tax years beginning after the date the regulations are published as final in the Federal Register; however, in the meantime, taxpayers can apply the proposed regulations to any open tax years.