Guest Article

(From the November 10, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Changes to Federal Income Tax Definition of Dependent Effective in 2009

The Fostering Connections to Success and Increasing Adoptions Act of 2008 made a number of changes to the IRC § 152 definition of "dependent," effective for taxable year beginning after December 31, 2008. These changes are noteworthy for employers because the IRC § 152 dependent definition forms the basis for determining if employees can cover certain individuals under their employers' group health plans on a tax preferred basis.

Background

A taxpayer may claim someone as a "dependent" for federal income tax purposes only if he or she is the taxpayer's "qualifying child" or "qualifying relative," as defined by IRC § 152. Currently, IRC § 152(c) imposes relationship, residence, age and support requirements in determining whether an individual is a "qualifying child." In terms of the required relationship, a "qualifying child" is a child of the taxpayer or descendent of such a child (or is a brother, sister, stepbrother or stepsister of the taxpayer or a descendent of such a relative). In terms of residence, the "qualifying child" must have the same principal place of abode as the taxpayer for more than one half of the taxable year. In terms of age, the "qualifying child" must be under age 19, or be a student under the age of 24, as of the close of the calendar year. In terms of support, the "qualifying child" must not have provided over half of his or her support for the taxable year.

Summary of Changes to IRC § 152 Dependent Definition

The Adoption Act amends IRC § 152(c) effective for taxable years beginning after December 31, 2008. It adds the following provisions:

Therefore, effective in 2009, where the individual is older than the taxpayer, the taxpayer may no longer claim the individual as a "qualifying child" dependent. Also effective in 2009, a non-parent (e.g., grandparent, aunt, or uncle) may claim an individual as a "qualifying child" if the parents do not and the non-parent's adjusted gross income is higher than that of either parent. Along the same lines, beginning in 2009, a married individual who files a joint return only for a claim of refund may constitute a "qualifying child" if the other requirements of IRC § 152(c) are met.

Where the requirements of "qualifying child" are not met, IRC § 152(d) provides a definition of "qualifying relative" by which the dependency exemption may still be claimed by the taxpayer. Generally, the exemption is available with respect to a relative whose gross income is less than the exemption amount and for whom the taxpayer provided more than half the support for the year. Therefore, where the individual is older than the taxpayer, the dependency exemption may still be available after 2008 if the individual's gross income is less than the exemption amount and the taxpayer provided more than half of the individual's support for the year.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.