Taxing Definitions

Definition — The domino doctrine

Thanks for sharing!
2 minute read
Image of falling wooden dominoes
Image source: Public domain from Dreamstime.com free images

In complicated systems, making a single change can result in other, unintended changes. That happened with the Tax Cuts and Jobs Act due to the suspension of the deduction for the personal exemption.

While the personal exemption itself was not repealed, the tax law reduced the deduction to zero. Prior to the change, the exemption amount for 2018 would have been $4,150.

The unintended changes were triggered because other parts of the US federal income tax code reference the personal exemption, and reducing the exemption to zero effectively eliminated the benefit of those provisions.

For example, section 152 of the internal revenue code generally allows the term “dependent” to include a “qualifying relative.” Part of the definition of a “qualifying relative” is an individual whose gross income is less than the exemption amount. Under that definition, an exemption amount of zero would mean the individual would have to have negative gross income.

In addition, the new $500 federal income tax credit for certain dependents can also apply to qualifying relatives, as can the filing status of “head of household.” In both cases, an exemption amount of zero eliminates the ability to claim a qualifying relative.

For tax years 2018-2025, the IRS says the reduction of the personal exemption will not be taken into account for purposes of determining whether an individual is a qualifying relative (see notice 2018-70).

***

Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions and IRS documents. The full documentation may include facts and issues not presented here. Please use the link provided in the post to read the entire document.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

***

Other posts you might enjoy

Definition — Qualifying the business income Image source: Tombaky, Dreamstime public domain Have you figured out the new federal income tax deduction for qualified business income? You may know this as the section 199A deduction. (See Taxing Lessons post here.) If you're one of the 23.7 million taxpayers the IRS estimates may be eligi...
Definitions — Driving the deduction Image source: Public domain photo Dreamstime.com As time goes by, the depreciation deductions add up. That's especially true with bonus depreciation. Under current tax law, you can deduct up to 100% of the cost of qualified property that you buy and put in service between September 27, 2...
Definition — Underestimating the estimate Image source: Dreamstime public domain Never underestimate the value of fun or tax payments. You'll pay the price in the long run. As a general rule, you're required to pay federal income tax as you earn income. The payments can be in the form of tax withholding from wages or pensions...
Definition — Laughter and other medical dedu... Image source: openclipart.org Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...

Because the suspension of the deduction for the personal exemption expires at the end of 2025.

$4,150, the calculated amount of the 2018 personal exemption before the Tax Cuts and Jobs Act. The amount for 2019 is $4,200.
Tagged