The Internal Revenue Service is issuing a final regulation that patches a hole created by the temporary removal of the personal exemption deduction from federal income tax returns.
- A preliminary version of the final regulation is available here.
- An article about a Supreme Court case involving an Affordable Care Act penalty that was zeroed out is available here.
A household could once use the personal exemption deduction to reduce its income tax bill by a set amount for each household member.
When members of Congress drafted the Tax Cuts and Jobs Act of 2017 (TCJA), they tried to simplify income tax returns. Drafters increased the size of another basic deduction, the standard deduction, and set the personal exemption deduction at zero for the years from 2018 through 2025.
Before the TCJA came along, a family applying for federal health insurance premium tax credit subsidies was supposed to give the number of personal exemption deductions claimed as its household size.
When Congress zeroed out the personal exemption deduction, one question was how, officially, a family was supposed to calculate its household size.
The IRS provided a temporary fix in IRS Notice 2018-84.
The IRS said in that notice that a taxpayer would be seen as taking a personal exemption deduction for himself or herself if the taxpayer filed an income tax return for a tax year and did not qualify as the dependent of another taxpayer.
The IRS said a taxpayer would be seen as having claimed a personal exemption deduction for other people, such as spouses and children, if the taxpayer would be allowed to take a $0 deduction for those individuals, and the taxpayer provided the names and taxpayer identification numbers of those people.
The IRS published a draft regulation based on the 2018 notice in May. That draft went through a public comment period and received no comments, according to the IRS.
The IRS is now in the process of getting the final version of the regulation published in the Federal Register. The regulations are set to take on the official Federal Register publication date.
The final regulations apply to taxable years ending on or after Dec. 31, 2020.
When the IRS puts advice in a notice, a taxpayer can rely on that advice in any enforcement proceedings, because what the IRS put in the notice is binding on the IRS, according to a U.S. Government Accountability Office analysis of IRS regulatory guidance processes.
When the IRS puts guidelines in a regulation, the guidelines may be easier for a taxpayer to find. For the IRS, the main difference is that the IRS can give the guidelines in a regulation the full force of law in any enforcement proceedings, according to the GAO analysis.