IRS Plugs a Hole Left by a Missing Deduction

An excerpt from the ACA premium tax credit filing form. (Credit: IRS)

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.

Resources

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.

Impact

Getting most legislation to the floor of the U.S. Senate takes 60 votes.

Special rules created in 1974 let senators get some big, must-pass budget bills to the floor with just 51 votes.

Because getting a budget bill through the Senate, and through Congress, is so much easier than getting other bills through Congress, lawmakers often try to achieve their goals by adding provisions to must-pass budget bills. It's also easier for senators to put changes in numbers in budget bills than to put other types of provisions in budget bills.

Members of Congress also face budget discipline rules. Those rules are easier on proposals for temporary spending increases and tax cuts than on proposals for permanent spending increases and permanent tax cuts.

Because of those constraints, members of Congress have temporarily set many taxes, penalties and deductions at zero in recent years, rather than simply repealing the taxes, penalties or deductions.

One example is the Affordable Care Act individual shared responsibility penalty. The ACA requires many people without what the government defines as a responsible level of health coverage to pay that penalty, in an effort to keep people from relying entirely on other people to pay their medical bills.

Republicans blocked the effects of the ACA individual responsibility penalty by setting the penalty amount at zero.

One difference between the TCJA provision that zeroes out the personal exemption deduction and many similar provisions is that Internal Revenue Code Section 151(d)(5)(B) states the following about the zeroing out of the personal exemption deduction:

For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.

Many other zeroing-out provisions in the Internal Revenue Code lack provisions that prevent the provisions from changing the effects of other tax rules.

— Read 3 Tax Surprises to Watch Out for in 2019, on ThinkAdvisor.

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