#11514 - Family Responsibility - U.S. Income Tax Law

FAMILY RESPONIBILITES

1. Family Expenses

   1. Two basic categories

      1. Child care expenses –based on actual expenditures (§21)

      2. Credits based on just having kids

2. Household and Dependent Care Expenses Credits (§21)

   1. Fixes part of the two-income couple problem

   2. Allows taxpayer to deduct up to 35% of up to $3000 for child-care if the expense allows him/her to be employed (but the amount of expenses can’t exceed the income of either spouse—i.e. if either spouse has less than $3K income)

      1. If AGI is $15K or less, credit is 35% of qualifying expenses, rate of credit reduced by 1% for each $2K by which AGI>15K, but never reduced to below 20%, everyone above $45K income gets 20%.

      2. Applies to dependents younger than 13, or who are physically or mentally incapable of caring for themselves (includes spouse who is a FT student)

      3. Can include some expenses outside the home such as qualifying daycare (21(b)) but not sleep-away camp

      4. Can report up to $6000 expenses if two or more children (21(c))

      5. Allocation: Household expenses such as housekeeper that are partially for care of the child should be allocated b/w the credit and not (Reg 1.21-1(d) p 1008 in supp).

   3. Use of credit, rather than deduction, and income-adjusted cap on eligible shows Congress meant it to be a subsidy for low-income earners

   4. School:

      1. Regs 21-1d—covers below kindergarten, but once we get above kindergarten, starts to look like private school, so that doesn’t count.

3. Child Tax Credits (§24)

   1. $1000 per child under age 17

   2. Phases out starting at $110K for married, $75K for individual. For every $1K or fraction thereof above the thresholds, reduces credit by $50

   3. Political compromise partial refundability: The credit is refundable to the extent of 15% of the amount by which earned income is over $10K (indexed to inflation).

      1. So, for example, if income is $14K, then 15% of $4k, or $600 is refundable

      2. Increase in amount refundable as income increases helps to offset the phase-out in EITC as income increases. Also, the credit (except for the phase-out) does not vary with income levels, so not subject to criticism of §151 exemptions that higher-income earners benefit more.

4. §129 Excludes employer-provided dependent care assistance programs, under most conditions [NOT ASSIGNED].

5. EITC (§32)—VERY COMPLICATED; WE’LL ONLY BE TESTED ON POLICY, NOT ON MECHANICS

   1. Conditioned on earning income

   2. Refundable—unlike most other credits, EITC is refundable. Basically using tax system to supplement subsidence income. These TPs have no tax liability b/c of exemptions and std deduction

   3. Amount of Credit: Depends on number of children

      1. No children: 7.65% of first $6070 earned income for childless, max of $464; reduced by 7.65% of amount by which AGI or earned income exceeds $7,590. Phase-out complete at $13,660

      2. 1 Child: 34% of first $9,100. Phase-out complete at $36K

      3. 2 Children: 40% of first $12,780, phase-out complete at $40, 964

      4. 3 kids special credit only through 2012

   4. JUST REMEMBER—THESE ARE HUGE AMOUNTS OF MONEY FOR FAMILIES AT THIS LEVEL OF INCOME

   5. 7.65% is employee’s share of payroll tax—effectively functions rebate of payroll tax for first $6070 for low-income people

   6. Policy:

      1. Achieves same affect as raising minimum wage for people with more family/childcare responsibilities without worrying about administrative difficulties or resulting disincentive to hire those people

6. §151 Exemption

   1. Each taxpayer can take one exemption for himself (2 for married couple) and one per dependent if no other taxpayer is claiming him. For married filing separately, can claim one for spouse if she has no income and no one else can claim her as dependent.

      1. Dependent defined (152): means qualifying child or sibling or stepsibling; cannot have any dependents if you are a dependent yourself; one spouse cannot be the other’s dependent if they file jointly; excludes non-citizens other than adopted children;

         • Must live w/ taxpayer at least half the year, less than 19 years old (or 24 if FT student) or permanently disabled; has not provided at least half of his own support

      2. Divorced parents: §152(c) gives it to the primary caregiver, not to both, but the custodial parent can waive it in favor of the noncustodial parent as long as the non-custodial has higher AGI.

   2. Amount for 2011 is $3.700, indexed to inflation.

   3. Phases out starting at $150K for joint returns, but no phase-out for 2010-12

   4. largely about horizontal equity—ceteris paribus, larger families have higher expenses, less ability to pay taxes. So its OK that relatively high-income before phase-out.

7. Low-Income Subsidies

   1. §151 exemptions plus standard deductions basically eliminates taxes on income below poverty level + EITC + low brackets in §1

8. Marriage Penalty

   1. Unavoidable: Marriage bonus / penalty is unavoidable byproduct of having progressive tax system + couples neutrality (taxing married couples with equal income equally). This is the case as long as one spouse has more income than the other.

      1. One way to avoid it is to move to flat tax, but then you lose progressive income tax system.

      2. Could just double standard deduction and make married brackets 200% of the single rates, but then you have a marriage bonus for one-income couples

         • Congress did this for the 10% and 15% bracket.

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