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Posts By Elaine Maag
Elaine Maag Robert Cherry
| Posted: June 7th, 2013
When couples decide to get married, the IRS is not the first institution they have in mind, but marriage can significantly affect how much taxpayers owe the federal government. Low-income earners—and low-income single mothers in particular—are especially vulnerable to marriage penalties through the tax code.
Most married couples owe less tax by filing jointly than they would if they were single: a marriage bonus. But low-income couples and high-income dual-earner couples still tend to face marriage penalties. In the extreme, consider a mother earning about $16,000 a year. If she has one child, she’ll qualify for about $3,200 from the earned income tax credit (EITC) and $1,000 from the child tax credit. (She also qualifies for food assistance from the Supplemental Nutrition Assistance Program --formerly food stamps-- and might qualify for child care and housing subsidies, depending on where she lives.)
If she were to marry a man earning about $25,000 a year, she would lose 90 percent of her EITC. That means that, together, they would owe almost $2,800 more in federal income taxes as a married couple than they would if they’d just decided to shack up. (Benefits outside the tax system are often sensitive to whether the couple lives together, but taxes are concerned only with marital status.)
What can we do to fix this imbalance?
One option would be to separate work and family credits in the tax code, with family credits reflecting the cost of maintaining a home and work credits incentivizing employment for low-income workers. All benefits would therefore be unrelated to marriage. Alternatively, newly married mothers could be given a marriage “grace period” during which they would continue receiving their pre-marriage benefits.
Both of those plans have problems, though. The first is potentially quite costly and may result in a politically untenable number of “losers” who would end up paying more in taxes. The second would not tax all married couples equally, which creates a new unfairness in the tax code.
Another solution, New Mothers Tax Relief, mitigates both of those problems by extending substantial EITC benefits to low- and moderate-income working couples until they jointly earn $40,000. The credits would then phase out by about $58,000.
For couples earning between $36,000 and $58,000 a year, New Mothers Tax Relief would provide at least $2,000 more in benefits than the current EITC program, reducing financial difficulties that often create marital tensions. The proposal limits total program costs by extending benefits only to families with children younger than six. Most important, for this vulnerable group of unmarried parents with young children, the federal tax code would be mostly removed from the decision to marry.
Photo illustration by Tim Meko, Urban Institute. Tax forms and mouse trap from Shutterstock.
Filed under: Government |Tags: Federal government, income, marriage penalty, marriage tax, poverty, Urban Institute Add a Comment »
| Posted: May 6th, 2013
If you’re a parent, whether you have a relatively high income or are earning minimum wage, you likely qualify for tax benefits. These benefits, when looked at in tandem, reveal a complex maze of support for families with children. Nearly everyone with children receives some benefit, but the pattern of benefits calls into question the overall fairness of the system. Independent of that, in a time of tight budgets, it’s appropriate for policy makers to question whether benefits are being delivered in the most efficient way possible.
For a single parent with two children, benefits rise rapidly before falling dramatically once income exceeds about $22,000—which is just above the 2013 poverty guideline for a family of three ($19,530). This can make it difficult for families as they try to move out of poverty—just as they earn a little more money, they lose the benefits that helped give them a leg up.
The largest of the child benefits for low-income, working parents—the earned income tax credit (EITC)—will provide an estimated $57.7 billion in benefits to 20.4 million families with children. (Additional, but much smaller, benefits will go to individuals without children.) Research consistently shows that the EITC encourages single mothers to work. It does this by supplementing wages by 34 to 45 cents for every dollar earned, until the maximum credit is reached. Parents with two children will receive a maximum credit in 2013 of nearly $5,400. The credit phases out beginning at income slightly below $18,000 for single parents. For married parents the phase out does not begin until earnings exceed about $22,000. Families in the lowest two-fifths of the income distribution receive almost all of EITC’s benefits.
On top of that, a low-income single parent of two could receive an income boost of up to $2,000 from the child tax credit (CTC). The CTC provides less benefit overall to low-income families with children because many families with higher incomes also receive the credit. In 2013, the CTC will distribute $55 billion in benefits to 35.5 million families with children, according to Tax Policy Center (TPC) estimates. Middle- and upper-income families will receive over half of the benefits from the CTC.
Fewer families with children benefit from the child and dependent care tax credit (CDCTC) than from the EITC or the CTC. And benefits are concentrated among relatively higher-income families. TPC estimates that, in 2013, families in the top 40 percent of the income distribution will receive over half of the $4 billion in benefits from the credit, in part because it never fully phases out.
Higher-income single parents can also benefit from the dependent exemption and head of household filing status (a special filing status afforded to single parents that generally taxes income at lower rates than a person would face if they filed as “single,” the equivalent filing status for unmarried individuals without children). Because both of these benefits depend heavily on a person’s tax rate, those with the highest rates receive the largest benefit. TPC estimates that households in the top fifth of the income distribution will receive an average benefit of $687 from the dependent exemption in 2013 compared with $10 for families in the bottom fifth. Over one-third of all benefits from the dependent exemption flow to families in the top fifth of the income distribution.
With the federal budget under enormous pressure, policymakers must spend limited dollars to maximum effect. Understanding how child-focused credits fit together—or don’t—and recognizing who benefits from them is a good starting point for lawmakers seeking to reform the tax code with fairness and efficiency in mind.
Filed under: Economy, Government |Tags: child, child tax credit, children, eitc, MetroTrends, tax, tax reform, TPC, Urban Institute 1 Comment »
| Posted: May 25th, 2012
State taxes and transfers can be an important form of assistance for low-income families. But the amount of government help varies widely among the states. And, importantly, so does what happens to those benefits when such a family increases its wages.
To help understand how those tax and spending programs work, the Urban Institute has created a new interactive Net Income Change Calculator (NICC). The calculator allows users to enter information about family and work characteristics, child care expenses, rent, and program participation. The calculator then provides estimates for taxes and transfers at five income levels so users can see how taxes and transfers change as income rises.
It includes state and federal income taxes, the employee share of payroll taxes, and a wide range of subsidy programs, including Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps), the Supplemental Nutrition Program for Women, Infants, and Children (WIC) as well as subsidies for Housing and Child Care. All rules represent 2008 law.
The calculator shows how different these benefits are, depending on where a low-income family lives. For example, in 2008, a single parent with two children aged 0 and 3 with poverty level wages could have received transfer benefits ranging anywhere between $4,000 in several states and $9,200 (Connecticut) if she participated in TANF, SNAP, and WIC.
In addition, she could have received about $6,700 in federal tax credits and either owed state income taxes or received additional tax credits. For example, in Alabama her state tax bill would be over $300 while in Connecticut she would owe no states taxes. She would also have owed almost $1,300 in the employee side of payroll taxes. We assume her childcare costs, before subsidies, would increase to about $250 per month – some of which could be offset by childcare subsidies. Together, taxes and transfers could have changed this mom’s income from $17,000 in wages to between $27,500 and $32,000 in income and benefits, depending on where she lived.
What happens if that mom gets a job?
A single parent in Connecticut with two young children could have received over $18,000 in transfer benefits if she had no earnings and no income, assuming her pre-subsidy rent was $600 per month. But suppose her earnings increased to $17,000 (poverty level) – spread evenly throughout the year – increases in childcare costs (assumed to be $250 per month before subsidies) and payroll taxes would have reduced her earnings by almost $2,000. Income tax credits and transfer benefits would have then added $16,500 – for a total net income of almost $33,000. If her income increased to twice poverty, she’d have to pay almost $5,600 in subsidized child care costs, state income taxes and payroll taxes. She’d receive about $6,400 in tax and transfer benefits – for a net income of $35,000. Thus, doubling her wages from $17,000 to $34,000 resulted in a net change in income of only about $2,000.
In contrast, the same family in Alabama could have received almost $17,000 in transfer benefits if the parent had no earnings. If her earnings increased to poverty-level, she would have spent over $2,500 on childcare, state income taxes, and payroll taxes, while transfer benefits and tax credits would have decreased to under $15,000. In total, the family’s net income would rise from almost $17,000 to $29,000. If her wages doubled, the combination of declining transfers, increased taxes, and higher childcare costs would have resulted in a total net income of $33,000 – an increase of about $4,000.
The NICC provides a powerful tool to understand both how states differ with respect to taxes and transfers, and to understand how a family’s income changes as a parent increases her earnings. Try it out.
Composition of Income for Single Parent with Two Children, Connecticut and Alabama, 2008
Source: Urban Institute Net Income Change Calculator May 2012
Filed under: Assets and debts, Government 1 Comment »