The child tax credit was revised to make it available to more taxpayers, under the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, making it a good time to revisit the expanded definition of dependents under Sec. 152.
New provisions enacted in 2017, including changes to the child tax credit, make the broadened definition of qualifying children and qualifying relatives more important than ever. But the expanded definitions also affect any taxpayer who qualifies to file as a surviving spouse (according to the U.S. Census Bureau, in 2018 there were 844,000 children under 18 living with a widow or widower parent in the United States).
The TCJA increased the income limitation of taxpayers who qualify for the child tax credit to $400,000 for married couples and $200,000 for single taxpayers, and the amount of the credit to $2,000 per child with up to $1,400 refundable. There is also a new $500 credit for other dependents such as children over 17 and other qualifying relatives. As a result, the definitions of qualifying children and relatives, which were expanded by the Working Families Tax Relief Act of 2004 (WFTRA), P.L. 108-311, have become important to more taxpayers.
WFTRA changed the meaning of a dependent in Sec. 152 by creating both the "qualifying child" and "qualifying relative" categories. The pre-WFTRA definition of a dependent was moved to the qualifying relative category as defined in Sec. 152(d). A qualifying child is defined in Sec. 152(c). WFTRA also added words that relax three of the same dependency requirements in 12 Code sections, all of which refer to the definition of a dependent as found in Sec. 152. This article explains how the relaxation of the three dependency requirements applies to the surviving spouse (qualifying widow(er)) filing status and briefly mentions where the same words are added to 11 other Code sections.
When a taxpayer's spouse dies, the taxpayer may qualify under Sec. 2(a) as a surviving spouse for two years after the year of the deceased spouse's death. Sec. 1(a) allows a taxpayer that qualifies as a surviving spouse to use the tax rate schedule for married taxpayers filing jointly. Under Sec. 2(a), a surviving spouse is a taxpayer:
(A)Whose spouse died during either of his two taxable years immediately preceding the taxable year, and
(B)Who maintains as his home a household which constitutes for the taxable year the principal place of abode (as a member of such household) of a dependent (i) who (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2),and (d)(1)(B) thereof) is a son, stepson, daughter, or stepdaughter of the taxpayer, and (ii) with respect to whom the taxpayer is entitled to a deduction for the tax year under section 151. [Secs. 2(a)(1)(A) and (B)]
Other limitations: A taxpayer does not qualify for surviving spouse status if he or she has remarried before the close of the tax year, or a joint return for the year of death could not have been made under the provisions of Sec. 6013 (Sec. 2(a)(2)).
Section 207(1) of WFTRA added the phrase "determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof" after "section 152" in Sec. 2(a)(1)(B)(i), above. Without the insertion of these specific subsections covering specific dependents, dependents in these three situations would not qualify a parent as a surviving spouse or for certain other benefits discussed later:
- Subsection (b)(1) prevents a taxpayer from claiming any dependency exemptions on his or her personal return when the taxpayer is claimed as a dependent on another taxpayer's return.
- Subsection (b)(2) prevents a person from being another taxpayer's dependent when that person files a joint return with his or her spouse.
- Subsection (d)(1)(B) requires that gross income for a qualifying relative dependent be less than the amount of the dependency exemption.
Subsections (b)(1) and (b)(2) apply to both qualifying children and qualifying relatives, while (d)(1)(B) applies to a qualifying relative only.
The waiver of the application of these three provisions allows individuals who normally would not be dependents for purposes of a dependency exemption to qualify a parent to file as a surviving spouse, thus increasing the number of individuals who can qualify a taxpayer to file as a surviving spouse.
Absent the phrase "determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof," dependents in these three situations (a dependent with children, a married dependent filing a joint return with a spouse, and a dependent with gross income exceeding the exemption amount) would not qualify a taxpayer to file as a surviving spouse, as the taxpayer would not meet the Sec. 2(a)(1)(B)(ii) requirement "with respect to whom the taxpayer is entitled to a deduction for the taxable year under section 151."
Sec. 152(c) defines a qualifying child as one who meets the principal place of abode test of having the same residence as the taxpayer for more than one-half of the tax year; the support test of not having provided more than one-half of the child's own support; the age test of being under 19 or 24 if a student; and the relationship test of being the taxpayer's child.
During 2016, a father and mother, F and M, lived with their 20-year-old daughter, D, a full-time student at a local college. F died during 2016. F and M supported D during 2016. M was eligible to file and did file a joint return for 2016.
During 2017, M maintained a household for D and provided over half of D's support. M will satisfy the principal place of abode test required to meet surviving spouse status. The qualifying child requirements specified in Sec. 152(c) are all satisfied, so M can claim D as a dependent and D would be a dependent for purposes of determining whether M qualifies for surviving spouse status. The three subsections mentioned above are not relevant in this situation.
Assume the same facts as Example 1, except that D's child, G, lives with M and D in M's household during 2017. G had no contact with her father during 2017. M maintains a household for D and G. D can file her personal return claiming G as a qualifying child dependent if she meets all the requirements for that dependency exemption. Because Sec. 152(b)(1), which would prevent D from having any dependents on her personal return, is waived, D can still be a dependent to qualify M to file as a surviving spouse, provided D meets all the other requirements to be M's qualifying child. G is a qualifying child for both D and M. However, D as the parent has priority and could qualify for child tax benefits (the earned income tax credit, dependent care credit, if applicable, and child tax credit) on her personal return by claiming G as a dependent.
As is explained in the Joint Committee on Taxation's Bluebook for 2005: "An individual who is treated as a dependent under the conforming amendment provisions generally is not subject to the general rule that a dependent of a taxpayer shall be treated as having no dependents for the taxable year of such individual beginning in such calendar year" (Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress (JCS-5-05), p. 130 (May 2005)).
Assume the same facts as Example 1, except D is married to H and they live with M during all of 2017. Normally, Sec. 152(b)(2) prevents a married dependent from being claimed as a dependent by another taxpayer when the married dependent files a joint return with his or her spouse. However, Sec. 152(b)(2) does not apply when determining if D can qualify M for surviving spouse filing status. However, D would have to satisfy all other Sec. 152(c) qualifying child requirements (the relationship, principal place of abode, age, and support tests) with regard to M. The waiver of Sec. 152(b)(2) allows M to claim surviving spouse status, and D can file a joint return with H.
Assume the same facts as Example 2, where M, D, and G live in the same household maintained by M for 2017, except D, age 20, is not a full-time student and earns $6,000 from a part-time job. D would not be a qualifying child, since she is not a full-time student and therefore fails the age test. D would not be a qualifying relative dependent, as her gross income exceeds the exemption amount. However, because Sec. 152(d)(1)(B) is waived for purposes of determining surviving spouse status, D's gross income amount can exceed the exemption amount. D must satisfy all the other Sec. 152(d) qualifying relative requirements (the relationship, qualifying child, and support tests) for M.
OTHER CODE SECTIONS CROSS-REFERENCING SEC. 152 SUBSECTIONS
The three subsections of Sec. 152 — (b)(1), (b)(2), and (d)(1)(B) — that do not apply in determining if a taxpayer is entitled to file a return as a surviving spouse are also not applied in other sections of the Code. These other current Code sections include:
- Sec. 21, Expenses for Household and Dependent Care Services Necessary for Gainful Employment: Defines a qualifying individual dependent who is physically and mentally incapable of self-care who has the same principal place of abode as the taxpayer for more than one-half of the tax year by reference to Sec. 152 that waives the application of the three subsections (Sec. 21(b)(1)(B)).
- Sec. 42, Low-Income Housing Credit: Defines certain students who do not disqualify a housing unit for the credit using a Sec. 152 definition that waives application of the three subsections (Sec. 42(i)(3)(D)(ii)(I)).
- Sec. 72, Annuities; Certain Proceeds of Endowment and Life Insurance Contracts: Defines a dependent by reference to Sec. 152 without regard to the three subsections for health insurance premium distributions from individual retirement plans to unemployed individuals (Sec. 72(t)(2)(D)(i)(III)).
- Sec. 105, Amounts Received Under Accident and Health Plans: Defines a dependent by reference to Sec. 152 without regard to the three subsections for payments unrelated to absences from work (Sec. 105(c)(1)).
- Sec. 125, Cafeteria Plans: Defines a dependent of a highly compensated participant (an officer, 5%-or-more shareholder, highly compensated individual, or a spouse or dependent of the prior three) by referring to Sec. 152 without regard to the three subsections (Sec. 125(e)(1)(D)).
- Sec. 139E, Indian General Welfare Benefits: Excludes from an Indian tribe member's gross income the value of Indian general welfare benefits paid to or on behalf of a member, a member's spouse, or a dependent. A dependent is defined in Sec. 152 without regard to the three subsections (Sec. 139E(c)(2)).
- Sec. 170, Charitable, Etc., Contributions and Gifts: Defines individuals other than a taxpayer's dependents by referring to Sec. 152 without regard to the three subsections when determining amounts paid to maintain certain students as members of a taxpayer's household (Sec. 170(g)(1)).
- Sec. 213, Medical, Dental, Etc., Expenses: Defines a dependent by referring to Sec. 152 without regard to the three subsections in determining dependent medical care expenses (Sec. 213(a)).
- Sec. 220, Archer MSAs: Defines qualified medical expenses with respect to an account holder's dependent by referring to Sec. 152 without regard to the three subsections (Sec. 220(d)(2)(A)).
- Sec. 221, Interest on Education Loans: Refers to Sec. 152 when defining a dependent without regard to the three subsections (Sec. 221(d)(4)).
- Sec. 223, Health Savings Accounts: Refers to Sec. 152 when defining a dependent's qualified medical expenses without regard to the three subsections (Sec. 223(d)(2)(A)). Sec. 223 was amended by the Gulf Opportunity Zone Act of 2005, P.L. 109-135, for these three subsections, effective as if included in WFTRA.
PRACTITIONERS SHOULD BE PREPARED
WFTRA broadened the definition of who is a dependent for a number of Code sections in a taxpayer-friendly way. Practitioners should be familiar with these definitions so that they can apply them when preparing tax returns and when advising clients.
About the authors
James M. Hopkins, CPA, MA, is a retired professor of accounting, and Mark C. Nielsen, CPA, MBA, is an assistant professor of accounting, both at Morningside College in Sioux City, Iowa.
To comment on this article or to suggest an idea for another article, contact Sally Schreiber, a JofA senior editor, at Sally.Schreiber@aicpa-cima.com or 919-402-4828.
- "Tax Practice Corner: Child Tax Credit Now Higher, More Widely Available," JofA, June 2018
- Tax Staff Essentials — Individual Bundle (#158322, online access)
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