«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»
161. See Julie Revelant, 6 for Kids—And Moms Too, Fox News (Dec. 1, 2013), http://www.foxnews.com/health/2013/12/01/6—for-kidsand-moms-too/ [http://perma.cc/63DN-VUNF].
Uncle Sam and the Childcare Squeeze 589 February 2016] were not working outside the home. For instance, play dates, homeschooling, and parent-driven activities provide far cheaper and often-utilized methods of providing socialization and educational opportunities for young children.162 The census data described above support these intuitions—over 70 percent of families with young children and stay-at-home parents entirely forewent any form of regular outside care.163 Furthermore, while some small percentage of nonworking parents seek outside care, they employ that care for only a fraction of the time that working parents do.164 And families with stay-at-home parents are far more likely to rely solely on relatives such as grandparents for childcare—an arrangement that may come at little to no monetary cost—since these parents will generally require care for far fewer hours than dual-earner and single-working parents.165 Thus, in the case of working childcare costs, the lion’s share of working parents will fit most easily into the Insubstantial Benefit Subset.
This analysis shows that working childcare costs are largely nonconsumptive and that parents should, therefore, receive tax relief for a sizable percentage of these costs. As discussed in Part I, however, the tax law comes nowhere close to providing this. Taxpayers earning over $43,000 can, at maximum, claim the equivalent of a $4,000 deduction under § 21 (assuming a 30 percent marginal tax bracket), or $5,000 under § 129’s FSA exclusion.
In even the very cheapest of states, this amounts to less than half the costs of providing full-time care for an infant and toddler. In the most expensive states, this will amount to less than one-sixth of the cost of providing fulltime care for two young children in a childcare center and may amount to a deduction of about one-tenth of the costs of hiring an individual caretaker like a nanny.166 This Article next considers the way in which the tax laws treat other hybrid expenses. As explained in Section III.A, this Article does not address the tax law’s failure to allow tax relief for commuting and various educational expenses, saving that discussion for a companion paper. In failing to address these costs, however, the next Section does not seek to fully survey the ways in which the tax laws treat all hybrid expenditures but instead seeks to show that the tax law currently allows greater relief for some hybrid expenditures that are more consumptive than working childcare expenses, further strengthening the argument that the limitations found in §§ 21 and 129 are far too stringent.
162. See Do Kids Really Need Preschool?, Huffington Post (Mar. 21, 2013, 12:04 PM), http://www.huffingtonpost.com/learnvest/do-kids-need-preschool_b_2917827.html [http://per ma.cc/3667-JM9C] (discussing alternatives to formal preschools, including play dates, parks, classes, and museums).
163. Laughlin, supra note 68, at 4.
164. See id. at 5–6.
165. See id. at 5.
166. See supra notes 74–87 and accompanying text.
590 Michigan Law Review [Vol. 114:559 C. Comparing Working Childcare Costs to Other Hybrid Expenses
1. Business-Related Meal and Entertainment Expenditures Suppose that Larry Lawyer flies to his favorite city to discuss a pending case with a client who lives there. He stays in his favorite hotel and orders room service for breakfast. He also takes the client to Larry’s favorite restaurant, where they discuss the case. After dinner, Larry brings the client to watch Larry’s favorite baseball team. May Larry deduct the costs of traveling to and staying in his favorite city? May he deduct the entertainment costs of taking himself and his client to dinner and a ball game? There are evident challenges in determining what tax relief is warranted for these meal and entertainment expenditures. Like working childcare costs, these expenditures are associated with both nonconsumptive and consumptive activities.
But the consumptive aspect of the meal and entertainment expense seems far more significant.
For one thing, the subset of taxpayers falling within the Full Consumption Subset described in Section III.B will be sizable—that is, it is easy to imagine taxpayers incurring meal and entertainment expenditures without work-related reasons for doing so. For instance, regardless of his client’s existence, Larry Lawyer may well have visited his favorite city, stayed in his favorite hotel, dined on a fancy dinner, and purchased tickets to watch his favorite team play baseball. People attend happy hours, restaurants, shows, and sporting events without work-related reasons for doing so. In contrast, nonworking parents do not tend to send their children to childcare for forty-five hours per week—and, in fact, census data show that most families, absent the necessity of work, do not use any form of outside childcare at all.
Thus, the Full Consumption Subset will be much more populated in the case of meal and entertainment expenses when compared to the case of working childcare costs.
Further, in the case of meal and entertainment expenditures, the Substantial Consumption Subset will be sizable. Even if Larry Lawyer would not have incurred the described expenses had he not needed to attend to his client’s business, he would nonetheless have derived some personal pleasure from the activities. At the very least, Larry would have eaten even if he were not on the business trip.167 Thus, while census data suggest that relatively few working parents can be expected to fall within the Substantial Consumption Subset, most taxpayers incurring meal and entertainment expenditures should fall within this group (if not within the Full Consumption Subset). As a result, the Insubstantial Benefit Subset can be expected to be far smaller in the case of meal and entertainment expenses when compared to the case of the working childcare cost.
One would, therefore, expect the tax law to provide more tax relief for working childcare costs than it does for meal and entertainment expenses. In
almost all cases, however, the tax law allows for the reverse. Currently, taxpayers may claim a deduction of 50 percent of “entertainment, amusement, or recreation”168 expenses, like expenses for dining and ball games, so long as the activity is not “lavish” and the activity is sufficiently related to the taxpayer’s business.169 But working parents requiring full-time childcare are generally entitled to tax relief that is worth far less than a deduction for half of their costs.
2. Business-Related Moving Expenses
Currently, the tax law allows taxpayers to deduct most moving expenses that are “incurred... in connection with the commencement of work”170 so long as the taxpayer’s move occurs within one year of receiving the new job, and the new job is “at least 50 miles farther from [the taxpayer’s] former home than [her] old main job location was from [her] former home.”171 In fact, if the taxpayer moves separately from his family, both sets of moving costs may be deducted.172 Clearly, however, the reasons for moving from one’s current residence are varied and not solely motivated by the desire to earn income.
Families, for instance, may move for more housing space, a lower cost of living, or better school districts for their children. A taxpayer, in deciding to leave his current location, may wish to live closer (or farther) from his family, or find a community whose interests and beliefs align more closely to his own. Thus, while a family may not move until work is found, many, if not
168. I.R.C. § 274(n)(1) (2012).
169. See I.R.C. § 274(a) (stating that the activity must either be directly related to or associated with the taxpayer’s trade or business). These laws were arrived at after a period of considerable debate and thought. In 1962—the Mad Men age of the two-martini lunch— President Kennedy, in his Special Message to Congress on Taxation, expressed his grave concern that “expense account living ha[d] become a byword in the American scene” and that “[t]oo many firms and individuals ha[d] devised means of deducting too many personal living expenses as business expenses, thereby charging a large part of their cost to the Federal Government.” President Kennedy “recommend[ed] that the cost of such business entertainment... be disallowed in full as a tax deduction and that restrictions be imposed on the deductibility of... expenses of business trips combined with vacations, and excessive personal living expenses incurred on business travel away from home.” President John F. Kennedy, Special Message to the Congress on Taxation (Apr. 20, 1961), http://www.presidency.ucsb.edu/ws/ ?pid=8074 [http://perma.cc/K935-2BCV]. But Congress did not go nearly as far as President Kennedy urged.
170. I.R.C. § 217 (“There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.”); IRS, Publication 521, Moving Expenses 2–4 (2013), http://www.irs.gov/pub/irs-pdf/p521.pdf [http://perma.cc/JML9-RMWN]. Not all expenses qualify. For instance, closing costs on house purchases are nondeductible. See id. at 9.
171. IRS, supra note 170, at 2–5. Notably, the fifty-mile distance test is slightly different when a taxpayer has a principal place of work prior to the move.
172. See id. at 8.
592 Michigan Law Review [Vol. 114:559 most, families choose to move for various nonwork related reasons. Therefore, although the Full Consumption Subset may not be very populated in the case of business-related moving expenses—for many, attaining new employment will be a necessary condition of moving—most taxpayers that incur deductible moving expenses fall within the Substantial Consumption Subset. As a result, only a small minority of taxpayers fall within the Insubstantial Subset—that is, will have moved solely for employment and not because the relocation offered other significant consumptive benefits.
This suggests that the percentage of working childcare costs that may be deducted should be at least as great as the percentage of business-related moving expenses eligible for a deduction. This is again not so, however, as the tax law allows a full deduction for qualifying moving costs and only allows parents tax relief equivalent to a deduction for a fraction of working childcare costs.
3. Hobby Expenses173
Consider finally how the tax law handles expenses associated with activities that are “not for profit,”174 more colloquially referred to as “hobby expenses.” Suppose, for instance, that Jack and Jill (J&J) together earn $50,000.
Suppose, however, that J&J do not have children and so do not incur childcare expenses. They do, however, really enjoy racing their yacht and incur $20,000 of expenses, including travel expenses, entrance fees, and boat maintenance to do so. J&J incur these expenses for the love of their hobby and do not care whether they win or lose. But they are very lucky one year and win $30,000. Should J&J be able to deduct the yacht racing expenses?
Many hobbyists will fall into the Full Consumption Subset because they are willing to incur the expense of engaging in these activities regardless of whether they earn any income. The remainder fall within the Significant Consumption Subset, only requiring a relatively slight amount of income (that need not exceed costs) in order to incur the hobby expenses. The Insignificant Consumption Subset will be, by definition, unpopulated since the activity is presumptively not profit motivated. It would, therefore, not be at all unreasonable to fully disallow deductions for hobby expenses—in many cases, such as the case of J&J, the hobbyist is not truly poorer by the amount of his hobby expenses because he received enjoyment (consumptive value) at least equal to the cost incurred.
Nonetheless, § 183 of the Code allows taxpayers to deduct these costs with several limitations. In this example, for instance, J&J may only deduct
173. This Section will assume away the Alternative Minimum Tax to show how § 183 applies as a default matter to hobby expenses. The hypothetical has purposefully presented a situation in which the taxpayer’s income falls below the exemption amount so that the AMT will not apply. For more about the AMT, see What You Should Know About AMT, IRS (Feb. 10, 2014), http://www.irs.gov/uac/Newsroom/What-You-Should-Know-about-AMT [http://perma.cc/W3C8-PQ3M].
174. I.R.C. § 183.
Uncle Sam and the Childcare Squeeze 593 February 2016] an amount equal to their gain on the transaction175—here because J&J’s gain is $30,000, J&J may, before other limits, deduct the entire $20,000. They must then subtract 2% of their adjusted gross income from this amount (here $1,600),176 so J&J are left with $18,400 expenses to deduct.177 Astonishingly, then, § 183 may provide more tax relief for the hobbyist than full-time working parents. Compare J&J’s situation to the situation of a married couple that together earns $80,000—the same amount of income as J&J. But instead of spending $20,000 on yacht racing, this couple spends $20,000 on childcare while they are working. Section 21 allows the couple a 20% credit of up to $6,000 expenses, an equivalent of only a $4,000 deduction if the couple’s marginal tax bracket is 30%.178 The preceding analysis strongly suggests that working childcare costs are, at least in significant part, nonconsumptive expenditures for which substantial tax relief is warranted. As also shown, however, the current law does nothing close to this. Instead, current law limits the relief provided to taxpayers incurring working childcare costs more severely than it limits the relief for more consumptive expenditures. The next Part develops a proposal that would achieve meaningful reform and help prevent the overtaxation of the modern working family.