«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»
Uncle Sam and the Childcare Squeeze 563 February 2016] other parents find themselves “squeezed out” of the job market entirely, unable to earn the additional income their family requires because they cannot find jobs that pay enough to offset soaring childcare expenses.16 This Article argues that §§ 21 and 129 of the Internal Revenue Code, which provide stringently limited tax relief for the costs of childcare incurred by working parents, have played an important role in aggravating these hardships. Currently, the Code treats the childcare costs incurred by working parents as personal expenses, subject to various dollar limitations, percentage limits, and phaseouts.17 Once these limitations are applied, working parents receive tax relief for only a small fraction of the childcare costs they incur. This Article shows that this is inappropriate as a matter of fundamental tax policy and results in the overtaxation of the working family. It then provides a blueprint for meaningful reform. Specifically, this Article urges lawmakers to resist the temptation to reform tax laws by simply relaxing current limitations, as this would leave parents vulnerable to the same legislative dysfunction that allowed tax relief for working families to become so limited in the first place.
This Article is not the first to notice that the tax laws are stacked against working parents.18 But previous scholars wrote in a social context in which one parent generally had the choice to forego work in order to care for her children19 and the salary of the secondary wage earner—almost always a woman’s—was discretionary.20 Accordingly, past scholarship has tended to
16. See Berman, supra note 6 (chronicling stories of parents looking for work who only find jobs offering wages that barely cover childcare costs); see also Cohn et al., supra note 13, at 6 (“A growing share of stay-at-home mothers (6% in 2012, compared with 1% in 2000) say they are home with their children because they cannot find a job. With incomes stagnant in recent years for all but the college-educated, less educated workers in particular may weigh the cost of child care against wages and decide it makes more economic sense to stay home.”).
17. See, e.g., I.R.C. § 21 (2012).
18. See, e.g., Britten D. Richards, Discrimination Against Married Couples Under Present Income Tax Laws, 49 Taxes 526 (1971); Kenneth J. White, The Tax Structure and Discrimination Against Working Wives: A Comment, 26 Nat’l Tax J. 119 (1973).
19. For ease of reading, this Article will use the gender pronouns “him” and “her” to represent all individuals on the gender spectrum.
20. See Grace Blumberg, Sexism in the Code: A Comparative Study of Income Taxation of Working Wives and Mothers, 21 Buff. L. Rev. 49, 49 (1971) (“The Code will be examined in its current social context. Thus, the observation that American working wives are predominantly secondary family earners is not intended to express a social ideal. It merely reflects a contemporary social reality. Women workers generally earn substantially less than their male counterparts. Working wives earn less than their employed husbands. The American wife’s working career is likely to be broken by child-bearing and rearing. Unless prompted by economic necessity, her return to work is generally considered discretionary. Even when she is earning a substantial salary, her husband is unlikely to view his employment as discretionary.” (footnotes omitted)); see also Boris I. Bittker, Federal Income Taxation and the Family, 27 Stan. L.
Rev. 1389, 1433 (1975) (“These burdens on the two-job married couple are often castigated as a deterrent to the employment of married women outside the home. In theory, of course, the 564 Michigan Law Review [Vol. 114:559 focus on how the tax laws provide disincentives for married women to enter the workforce and has proposed reforms designed to create more desirable behavioral incentives.21 These conversations, however, are increasingly off target. Today, two-parent families can rarely afford to have one parent stay home to provide childcare, a luxury that single parents are even less likely to enjoy. This Article, therefore, stands poised to be the first academic piece to critically address how a reformed tax system should tax the modern working family.
Part I of this Article describes how Internal Revenue Code §§ 21 and 129 severely limit the ability of working parents to reduce their taxable income to reflect today’s high childcare costs. Part II discusses the basic principles of tax law that govern whether a taxpayer should be able to reduce her tax liability to reflect a particular expenditure. Applying these principles, Part III argues that working childcare costs should be treated primarily, if not entirely, as nonconsumptive expenses, justifying a tax reduction for at least almost the entire cost. Because current law mistreats childcare expenses as consumptive personal costs, Part IV urges lawmakers to reform the tax laws by properly treating working childcare expenses like other nonconsumptive costs of earning income. Part V concludes that while the tax laws cannot (and should not) solve all problems facing today’s working family, the reforms this Article proposes would help prevent overtaxing working families and at least ease their economic struggles.
I. Current Law: The Limited Tax Relief Provided to Working Families There are several mechanisms by which the Internal Revenue Code allows a taxpayer to reduce her tax liability, providing some degree of tax relief. For instance, some provisions of the Code allow a taxpayer to deduct expenses she has incurred from her taxable income or credit them against burden arises whether the ‘secondary’ wage-earner is the husband or the wife, and hence falls on the couple jointly. In a society that takes the husband’s job for granted and views the wife as the secondary wage earner, however, it is reasonable to describe the existing state of affairs as biased against women.”).
21. See, e.g., Bittker, supra note 20, at 1433; Edward J. McCaffery, Taxation and the Family: A Fresh Look at Behavioral Gender Biases in the Code, 40 UCLA L. Rev. 983, 987 (1993) (“[T]he Article explores how the tax laws provide behavioral incentives that affect three types of decisions: whether to marry, whether to form a one- or a two-earner household, and whether to work full or part time.”); Margaret Ryznar, To Work, or Not to Work? The Immortal Tax Disincentives for Married Women, 13 Lewis & Clark L. Rev. 921, 921 (2009) (“Among the most fundamental barriers to the aggressive participation of many married women in the work force are the disincentives for secondary income earners embedded in the federal tax code.”); Nancy C. Staudt, Taxing Housework, 84 Geo. L.J. 1571, 1573 (1996) (“The marketoriented approach to women’s equality and liberation acknowledges the material costs associated with performing unpaid labor and the role it plays in preventing women from obtaining the level of wages and benefits that men receive in the market. To remedy this problem, the market-oriented scholars have devised practical solutions that would, in effect, provide women with greater returns on their market labor.”).
Uncle Sam and the Childcare Squeeze 565 February 2016] her tax liability.22 Other provisions provide exemptions by allowing taxpayers to exclude from their taxable income amounts or benefits that would otherwise be included in income and subject to taxation.23 Currently, the law provides very limited tax relief for the costs of caring for one’s dependents, including children (the focus of this Article) as well as the elderly and disabled.24 The available tax relief can be separated into relief for two categories of costs: relief for childcare expenses that enable taxpayer parents to work (“working childcare costs”) and relief for child-related expenses that are not associated with income production (“nonworking childcare costs”). Part II further explains the significance of this. After discussing the various tax provisions, which provide relief for these different costs, this Part shows that the Code currently allows tax relief for only a fraction of the childcare costs working parents can be expected to incur.
A. Tax Relief for Nonworking Childcare Expenses
Sections 151 and 24 of the Internal Revenue Code allow a parent to reduce her tax liability by set amounts that reflect a portion of the costs she can be expected to incur to care for her children. The availability of the relief these provisions offer is not tied to whether parents incur these expenses while working; nor is it tied to whether parents work at all. Instead, these provisions allow taxpayer parents to make downward adjustments to their income tax liability to reflect the inevitable costs of child rearing, which taxpayers without parental obligations do not incur.25
22. See, e.g., I.R.C. § 162.
23. See, e.g., id. § 129. For the tax novice, if a specific code provision allows a taxpayer to deduct an expense, that taxpayer may subtract the cost from her taxable income. Suppose, for instance, that a taxpayer earned $100,000 gross income this year and incurred $6,000 deductible expenses. After the deduction, the taxpayer would be able to reduce her income from $100,000 to $94,000. An exemption, on the other hand, allows a taxpayer to exclude from her taxable income items that would otherwise be includible. Thus, suppose the taxpayer earned $100,000 gross income this year, consisting of $94,000 of cash and $6,000 of noncash benefits (such as healthcare, childcare, etc.). Generally, a taxpayer must include in income the fair market value of benefits received and thus, in this scenario, the taxpayer would, as a general matter, have taxable income equal to $100,000. If, however, a provision of the Internal Revenue Code allowed the taxpayer to exclude the benefits—put another way, these benefits were exempt from taxation—the taxpayer would have to include only $94,000 in her taxable income. A tax credit provides a dollar-for-dollar reduction of a taxpayer’s tax liability. Contrast this with a deduction, which instead reduces one’s taxable income—the amount on which relevant tax rates are applied to determine final tax liability.
24. See id. § 152 (defining dependents).
25. Put another way, these sections reflect the judgment that if two taxpayers earn the same income but only one cares for dependent children, the caretaker should have a lower tax liability to reflect these costs. This Article does not cover the Earned Income Tax Credit, which allows taxpayers to take a dollar-for-dollar credit if their adjusted gross income is below a certain threshold. Both the applicable threshold and credit increase as the number of children dependent on the taxpayer increases.
566 Michigan Law Review [Vol. 114:559 As a default matter, § 151 allows a taxpayer to exclude from her taxable income a personal-dependency exemption amount,26 which is $4,000 for the 2015 tax year.27 A married couple filing jointly is entitled to claim two personal-dependency exemptions (one for each spouse) and an additional personal exemption for each of the couple’s dependents.28 A single parent with full custody of his two children would claim three personal exemptions on his income taxes.29 Section 151 helps to define a minimum level of income below which no taxation will be levied. To illustrate, § 151 initially allows a childless couple filing jointly to exclude $8,000 from its taxable income, and a married couple with two children to exclude $16,000. Thus, if the former and latter couples were to earn less than $8,000 or $16,000, respectively, they would have no taxable income once they had claimed the personal exemptions to which they were entitled.
Of course, § 151 will not completely eliminate the tax liability of all taxpayers, but may still reduce that liability to a significant extent. For instance, a married couple without children that earned $100,000 taxable income in 2015 would, after claiming exemptions, pay taxes on $92,000, resulting in a $14,587 tax liability30; a married couple with two children earning the same $100,000 would only pay tax on $84,000, resulting in a $12,587 tax liability.31 The personal-dependency exemption amount “phases out” for taxpayers at even higher income levels—that is, taxpayers begin to lose a percentage of the exemption amount once their earnings surpass a designated threshold, and they lose a greater percentage of the exemption as income rises past that amount.32 In 2015, a married couple filing jointly begins to lose a percentage of its exemption amount once the couple’s combined income reaches $309,900, and it will lose the entire exemption amount once its income exceeds $432,400.33 A single parent filing as a head of household will begin to lose the benefit of the personal-dependency exemption once income reaches $284,050 and will lose the entire exemption once income reaches $406,550.34
26. I.R.C. § 151(b)–(c).
27. Rev. Proc. 2014-61, 2014-47 I.R.B. 860, 866, http://www.irs.gov/pub/irs-irbs/irb14-47.pdf [http://perma.cc/9ZDP-LPVZ].
28. I.R.C. § 151.
29. See id. § 152(c)(4)(B) (allowing exemption for custodial parent).
30. See id. § 1(a); Rev. Proc. 2014-61, 2014-47 I.R.B. 860, 861. All hypotheticals assume all income is ordinary income, unless otherwise stated.
31. See sources cited supra note 30.
32. See Rev. Proc. 2014-61, 2014-47 I.R.B. 860, 866.
Uncle Sam and the Childcare Squeeze 567 February 2016] A single parent filing as unmarried will begin to lose the benefit once income reaches $258,250 and will lose the entire exemption once income reaches $380,750.35 In 1997, Congress added § 24 to the Code to supplement the tax relief provided to families by § 151.36 Before phaseouts, current § 24 allows taxpayers to claim a $1,000 “child tax credit”—that is, a $1,000 reduction in the taxpayer’s tax liability37—for each dependent child.38 Building on the example above, the childless couple earning $100,000 would have a $14,587 tax liability while the couple with two children would have a tax liability of $12,587 less $2,000, or $10,587.