Premium Tax Credit, Shared Responsibility Penalty, and the Personal Exemption Deduction


The Tax Cuts and Jobs Act (TCJA) reduced the personal exemption deduction to zero for tax years 2018 through 2025. Likewise, TCJA eliminated the shared responsibility penalty for tax years starting in 2019, however, it still applies for the 2018 tax year. The IRS recently issued guidance on how the reduction of the personal exemption deduction to zero applies for purposes of certain rules under IRC section 36B relating to the Premium Tax Credit and under IRC section 5000A relating to the individual shared responsibility penalty. The Premium Tax Credit includes rules that apply based on whether a taxpayer claims a personal exemption deduction for an individual. These rules affect eligibility for the Premium Tax Credit, the computation of the Premium Tax Credit, reconciliation of advance payments of the Premium Tax Credit, and income tax filing requirements related to the Premium Tax Credit. The shared responsibility penalty includes rules that apply based on whether a taxpayer claims a personal exemption deduction for an individual.

Specifically, the new IRS guidance applies the following rules for purposes of claiming the Premium Tax Credit and for purposes of the shared responsibility penalty:

1) A taxpayer is considered to have claimed a personal exemption deduction for himself or herself for a tax year if the taxpayer files an income tax return for the year and does not qualify as a dependent of another taxpayer for the year.

2) A taxpayer is considered to have claimed a personal exemption deduction for an individual other than the taxpayer if the taxpayer is allowed a personal exemption deduction for the individual, taking into account IRC section 151(d)(5)(B), and lists the individual's name and TIN on the federal income tax return that the taxpayer files for the year. IRC section 151(d)(5)(B) states for purposes of any other tax provision, the reduction of the personal exemption amount to zero is not taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction.

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