On September 16, 2020, the IRS issued two final regulations, both of which address the reduction to zero of the Code Section 151 personal exemption deduction under the Tax Cuts and Jobs Act (TCJA) (26 U.S.C. § 151; see Tax Cuts and Jobs Act (TCJA) Compliance for Fringe Benefits and Health Plans Toolkit). Specifically, the regulations address the TCJA's change to the personal exemption deduction regarding:

The final regulations addressing the Code's definition of dependent clarify how a gross income test applies under the Code's rules for determining who is a qualifying relative.

As background, the Code defines the term "dependent" for various purposes as either a qualifying relative or a qualifying child (26 U.S.C. § 152; see Legal Update, Reflecting WFTRA, IRS Rules Address the Definition of Dependent). In turn, one component of the Code's definition of qualifying relative is a requirement that an individual have gross income below an exemption amount stated in Code Section 151(d) (26 U.S.C. § 151(d)). Before the TCJA, Code Section 151(d) provided for an exemption amount of $2,000 (adjusted annually for inflation). However, the TCJA amended Section 151 to reduce this exemption amount to zero for the 2018 through 2025 tax years.

In August 2018 guidance, the IRS indicated its intent to issue proposed regulations providing that the reduction to zero of the Code Section 151 exemption (for 2018 through 2025) would not be considered in determining whether a person is a qualifying relative under Code Section 152(d)(1)(B) (26 U.S.C. § 152(d)(1)(B)) (Notice 2018-70; see Legal Update, IRS Clarifies Scope of Personal Exemption Reduction Under the TCJA). Rather, the Code Section 151(d) exemption amount would be treated as $4,150 (as adjusted for inflation) during the TCJA suspension years (2018 to 2025).

As a result, under IRS proposed regulations issued in June 2020 (as anticipated in Notice 2018-70), the Section 151(d) exemption amount during the TCJA suspension years:

(85 Fed. Reg. 111 (June 9, 2020).)

The IRS's September 2020 regulations finalized the June 2020 proposed regulations with no substantive changes.

The PTC is a refundable tax credit for eligible individuals and families who purchase health insurance through an ACA exchange (26 U.S.C. § 36B; see Practice Note, Affordable Care Act (ACA) Overview: Premium Tax Credit under Health Insurance Exchanges). Individuals who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. Certain PTC-related rules apply based on whether an individual properly claims or claimed a Code Section 151 personal exemption deduction for the individual and the individual's spouse and any dependents. For example, these rules include PTC eligibility, calculating the PTC, and reconciling advance credit payments with the PTC.

In 2018, the IRS provided interim guidance clarifying that the TCJA's reduction to zero of the Code Section 151 personal exemption did not affect an individual's ability to claim the PTC (Notice 2018-84). The 2018 guidance provided that an individual:

The 2018 guidance also indicated the IRS's intent to amend its PTC regulations to clarify how the Code Section 151 personal exemption rules apply, post-TCJA. The IRS issued a proposed version of these regulations in May 2020 (85 Fed. Reg. 31710 (May 27, 2020)). As proposed, the regulation would define the term "family" to mean:

Having received no comments on the May 2020 proposed regulations, the IRS finalized the regulations in September 2020 with no changes. The final regulations apply for tax years ending on or after December 31, 2020, but individuals may apply the final regulations for tax years ending before December 31, 2020.