Tax Policy Center | Urban Institute and Brookings Institution

Tax Simplification: Clarifying Work, Child, and Education Incentives

Elaine Maag

Published: March 30, 2011
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Abstract

The federal income tax code is riddled with complex provisions concerning children. Families with children qualify for and receive substantial assistance, but the provisions are difficult for parents to understand and for the IRS to administer. This article proposes making uniform the definition of child — under age 19, regardless of student status — for the key child benefits: the earned income tax credit, the dependent exemption, head of household filing status, and the child tax credit. Savings from the proposal could be used to subsidize higher education, particularly for low-income families that would lose assistance from the EITC. The proposal would simplify the tax system, clarify incentives, and set the stage for broader reform.

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The code provides substantial benefits to families with children through a wide array of child-focused tax provisions. Those provisions either reduce taxes owed, relative to individuals and families without children, or provide a direct benefit akin to a traditional spending program, albeit administered through the tax system. Those provisions have two primary goals: to adjust tax burdens for a family's ability to pay and to encourage particular behaviors, most notably work. The child tax credit (CTC), the earned income tax credit, the dependent exemption, head of household filing status (granted to single parents), and the child and dependent care tax credit (CDCTC) are the core child provisions. Congress enacted those provisions piecemeal, with the result that families with children now face considerable complexity when completing their tax return.

Beyond those broad child subsidies exist myriad college subsidies for children and their parents, including the American opportunity tax credit (AOTC), the deduction for tuition and fees, and the lifetime learning credit. Benefits from those provisions depend on having college expenses, creating a clear link between the subsidy and college attendance. Other college subsidies in the tax system, such as the EITC, dependent exemption, and head of household filing status, are less obvious, in part because they don't go exclusively to students' families. Those subsidies end when children reach age 18, except when children between 19 and 23 are full-time students for at least five months of the year. Because those benefits are not linked to college expenses, there's no obvious connection between the child's attending college and the family's receiving benefits. The student exception in those provisions increases complexity for families and makes the IRS's job of administering the tax code more difficult.

This article reviews prior simplification efforts and current law, and analyzes a proposal to apply a uniform age test of under 19 years old for the CTC, EITC, dependent exemption, and head of household filing status. The proposal would save an estimated $900 million, which could be used to enhance college assistance for low-income families to offset losses from the EITC for those families. A discussion of the proposal concludes this article.

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