Tax reform legislation enacted in December 2017 suspended the deduction for the personal exemption under Code Section 151 for tax years beginning after 2017 and before 2026 (Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97 (2017); 26 U.S.C. § 151(d)(5); see Legal Update, Tax Reform Is Enacted, With Significant Implications for Executive Compensation and Employee Benefits). Before tax reform, the exemption amount under Code Section 151, as adjusted for inflation, was $4,150 for 2018. As a result of tax reform, however, the personal exemption amount under Code Section 151 is reduced to zero for tax years 2018 through 2025.

The tax reform changes to Code Section 151 also provide, however, that for any other Code provision, the reduction of the personal exemption to zero is considered in determining whether a deduction is allowed (or whether an individual is entitled to a deduction) under Code Section 151 (26 U.S.C. § 151(d)(5)(B)). As a result, it was believed that the reduction of the personal exemption to zero would not affect the operation of Code provisions referencing the allowance of a deduction under Code Section 151.

In Notice 2018-70 (Aug. 28, 2018), the IRS indicated that it plans to issue proposed regulations clarifying how the suspension of the personal exemption under Code Section 151 impacts Code Section 152, which defines the term "dependent" to mean a "qualifying child" or a "qualifying relative." The Code Section 152(d)(1) definition of "qualifying relative" includes a gross income test that expressly references the Code Section 151(d) exemption amount.

Specifically, Notice 2018-70 provides that the IRS intends to issue proposed regulations stating that the reduction to zero of the Code Section 151 exemption for tax years 2018 through 2025 will not be taken into account in determining whether a person is a qualifying relative under Code Section 152(d)(1)(B). As a result, in defining a qualifying relative for purposes of the various Code provisions that reference the Code Section 152 definition of dependent, the Code Section 151(d) exemption amount will be treated as $4,150 (as adjusted for inflation) for the tax years during which the exemption amount is zero.

The definition of qualifying relative is applicable in some benefits contexts, for example, in determining who is a tax dependent eligible for health coverage on a tax-free basis. However, because the income test under the Code Section 152(d)(1) definition of qualifying relative – which references the Code Section 151(d) personal exemption – is already disregarded in determining whether the individual is a dependent, the planned IRS regulations addressing the tax reform change under Code Section 151 should have little bearing in this regard.