Every year, the federal government directs over $170 billion in tax benefits toward families with children. But families are getting more complicated, and as they do, so does tax filing for benefits such as the earned income tax credit (EITC), child tax credit (CTC), dependent exemption, head of household filing status, and the child and dependent care tax credit (CDCTC). Elizabeth Peters, Sara Edelstein, and I have just published a new paper that documents the growing complexity of America’s families and how that phenomenon makes tax filing more difficult. We presented our results at a recent Tax Policy Center panel.
These benefits are distributed to a “tax unit” that represents adults with children. The law is built on the idea that a child lives in a traditional family – married parents with only biologically related siblings. The tax unit it is presumed to include the adults supporting the child.
But increasingly, children live in arrangements that belie that traditional family; children move between homes of divorced or never-married parents in formal and informal custody arrangements; children live with unmarried, cohabiting parents; children live in multigenerational households. In short, children are supported by adults in multiple tax units.
For low- and moderate-income families, the traditional family is no longer the norm. In 2008, the most recent data available from the Survey of Income and Program Participation, 40.3 percent of children lived with their married parents and their biologically related siblings only, down from 46.9 percent in 1996. Another 11.3 percent lived with married parents and non-biologically related siblings, up from 9.6 percent. Over the same period, the share of low- and moderate-income children living with cohabiting couples almost doubled from 4.9 percent to 8.2 percent. Most children living with cohabiting couples also live in families with at least one non-biologically related sibling.
Because tax benefits are typically awarded to exactly one tax unit per child, parents who live apart but each provide support for a child will come up short when it comes to claiming tax benefits - one won’t qualify for benefits. The exception to this is when special rules for divorced or legally separated parents are used to allocate some benefits, an option not available to cohabiting or never married parents.
In addition, children or parents from low- and moderate-income non-traditional families are most likely to move in and out of the household from year to year. This makes it difficult for families to use a prior year’s tax return as a template for the current year.
Multiple tax units, including parents who live apart or grandparents, may support a child in a non-traditional family – and these families are most likely to have parents and children moving in and out of the household over the course of the year. They must sort through a complex residency test to determine who qualifies for the tax benefits. For children moving between homes – either in a shared custody arrangement or out of necessity – families are unlikely to have documented where the child spent each night. Yet, the IRS distributes tax benefits based on proof that a child lived with one parent for more than half the year.
Finally, the “winner-take-all” nature of these tax benefits creates a huge incentive for people related to a child to “race to the taxpayer” to claim the child first, a phenomenon noted by Francesca Jean Baptiste at the TPC panel. This complicates filing for other relatives who try to claim the child. The IRS will usually deny duplicate claims and disputes are likely to significantly delay a taxpayer’s refund.
Tax benefits for children can provide a substantial lift for families – but for people living in the growing number of non-traditional families, these benefits can be complicated to claim and difficult for the IRS to administer.
