The voices of Tax Policy Center's researchers and staff
In the realm of needless complexity, the work and family tax credits for low-income households rank near the top. The problem is especially challenging for immigrant families whose children’s legal status and residency determine eligibility for these credits.
A few weeks ago, the National Taxpayer Advocate in her Annual Report to Congress joined many others in calling for separating the work and family incentives in the tax code. This approach could make tax filing simpler and more efficient for low-income families.
Currently, the three largest child related provisions – the dependent exemption, the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC) – have three sets of rules governing eligibility. These inconsistencies in the law create confusion and prevent people from claiming deductions or credits for which they are eligible. Here are a few examples of how the rules differ:
- Children who are U.S. citizens or nationals qualify for all three benefits, if they live in the United States.
- Other children who reside in the U.S., Canada, or Mexico may be eligible for the dependency exemption.
- The CTC requires that the child reside in the U.S.
- The child must reside in the U.S. and have a Social Security number to be eligible for the EITC.
- Depending on whom you ask, a child may or may not need a Social Security number to get the Additional Child Tax Credit (ACTC)—the refundable portion of the CTC. The Treasury Inspector General for Tax Administration claims that children must meet the stricter EITC qualifications to get the ACTC. But the IRS maintains this interpretation is incorrect and says children need only reside in the U.S. as they would for the non-refundable portion of the CTC. Legislation to change the criteria for the ACTC to explicitly require SSNs did not pass in the last Congress.
The National Taxpayer Advocate’s recommendation to separate the dependent exemption, CTC, and EITC into a worker credit and a family credit follows that of many others (and this is not the first time the National Taxpayer Advocate has made the recommendation). In 2011, I suggested we separate work and family credits to clarify and strengthen incentives in the tax code. Similarly, the Bipartisan Policy Center, the George W. Bush Tax Reform Panel, and advocates for low-wage workers without children living at home all support separate work and child incentives in the tax code. The worker credit would not be affected by the presence of children so whatever rules were adopted for the child credit (and the current ones applying to the dependent exemption make sense to me) would be the only rules parents would need to know. I support refundability of both credits for simplicity.
This is a good idea for a whole host of reasons. Immigration reform is only one. Many policy analysts agree on the solution, but Congress has yet to seriously consider the notion. Maybe the Taxpayer Advocate’s recent report and the newly energized immigration debate will encourage lawmakers to finally separate work and child credits. It is about time.
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