IRS Publishes Proposed Regulations on the Definition of “Dependent"

On Jan. 19, 2017, the IRS published proposed regulations on the definition of “dependent” as that term is used in IRC Section 152. The proposed regulations are meant to formalize several changes made by prior law, including the Working Families Tax Relief Act of 2004 and the Fostering Connections to Success and Increasing Adoptions Act of 2008. Those prior pieces of legislation amended the IRC for purposes of claiming dependent status and federal income taxation by adding the terms “qualifying child” and “qualifying relative.” The proposed regulations update existing regulations to reflect those changes and other related guidance previously published by the IRS.

Tax dependent status is important for employer-sponsored benefits, since only employees and their tax dependents may receive such benefits on a tax-advantaged basis (such as major medical care, dental, vision, group term life insurance, dependent care assistance, etc.).

The proposed regulations include a description of determining a taxpayer’s gross income under the so-called ‘tiebreaker’ rules (where one dependent can be claimed as a qualifying child by more than one taxpayer). The regulations also describe the treatment of governmental payments when it comes to determining an individual’s support. With respect to determining ‘qualifying child’ status, the regulations include information on certain statuses, including relationship, income and support (such as determining the sources of an individual’s support and whether an individual resides for more than half of the year with the taxpayer). The regulations include examples to help illustrate these points.

The proposed regulations do not have a major impact for employers—the guidance formalized in the regulations has been effective for some time, and some of the guidance impacts individuals only on their respective individual federal income tax returns. Regardless, employers still must identify the dependent tax status of any non-employee to determine whether the employer can offer benefits to non-employees on a tax-advantaged basis. Employers should work with their advisors and accountants in properly making those determinations. In addition, as a result of Pres. Trump’s executive order relating to federal regulatory action (see our article above), it’s unclear whether and when these proposed regulations will be finalized.

Proposed Regulations »