Updated: Nov 4
The Tax Cuts and Jobs Act (TCJA) billed itself as a tax cut for middle-class families. However, by taking away the personal exemption, the tax reform bill of 2017 hurt many middle-class taxpayers, especially America’s big families. Regardless of your politics, it is worth taking the time to understand how the TCJA hit at the core of America – its big families – by eliminating this tax break. The loss of the personal exemption in the TCJA is a financial assault on the very constituents TCJA purports to serve.
The Big Subtraction of the Personal Exemption
Sparing you the tax minutia*, when Congress reformed taxes in 2017 with the stated goal to reduce taxes for American families, they enacted two potentially beneficial elements: raising the child tax credit from $1,000 to $2,000 and lowering tax brackets, which reduced taxes for some taxpayers. However, they also repealed a tax break called the “personal exemption,” which, in simple words, lets you subtract (in 2017) $4,050 for every person listed on your tax return. That means that married taxpayers with six kids got to subtract eight (2 for you/your spouse and 6 for each of the kids) times $4,050 from their taxable income or $32,400 from their taxable income. And, in addition to that personal exemption reduction, they still got a child tax credit of $1,000 per kid under 16 in addition to that $4,050 subtraction to the tune of $6,000 for six little kids or a total subtraction from income of $38,400). For larger families, the loss of that $4,050 personal exemption meant that the TCJA was a tax increase, not a tax cut.
Unfair to Big Families
This tax change becomes even more gallingly unfair to your big family as your kids get older. As the kids grow up, you’re going to get socked even worse because as each kid reaches age 17, you lose that $2,000 TCJA Child Tax Credit. Before TCJA, we had a $1,000 per child Child Tax Credit plus a $4,050 personal exemption for each kid for total subtraction of $5,050 per child under 16 and $4,550 for college kids. The TCJA increase in the Child Tax Credit to $2,000 per kid helps offset the loss of the personal exemption, but it doesn’t equal it out. The Child Tax Credit is $2,000 (in 2019) and the personal exemption had been about $4,000 (it had been going up slightly each year and in 2017 was $4,050, plus you still got that $1,000 Child Tax Credit per kid with it), so losing the exemption with a non-commensurate raise in Child Tax Credit certainly isn’t equivalent.
Parents can claim their kids as dependents (i.e., tax deductions) up until age 24 if those kids are in college. Since many children go to at least two years of college and kids continue to be their parents’ dependents through age 24, the loss of the personal exemption means that for each child, you as taxpaying parents lose as many as 8 years of an annual tax deduction of $4,050 (which is $32,400 per kid over those 8 years if your kids go to undergraduate and grad school though age 24).
Governments Shape Behaviors with Tax Policy
Let’s shift directions and talk about what governments aim to do with tax policy. One way that governments shape citizens’ behavior is through the tax code. Three examples follow.
Homeownership: Decades ago it was decided that home ownership was a desirable American value and that more middle-class Americans should own homes (up through the 1940s, American home ownership rates were below 50%; by the 1960s and continuing until recent years, homeownership rates are around 65%). Over time, the government created tax breaks for mortgage loans and residential property tax and developed a lending system where home loans were offered at a much lower interest rate than other kinds of debt. American homeownership increased.
Retirement Savings: In the late 1970s, the government became concerned about American retirement assets. Pension funds lacked sturdiness; Social Security was threatened; inflation took a toll on American pocketbooks. The ERISA law marked the inception of the IRA, a tax-advantaged vehicle to save for retirement. The 401(k) rolled out later in 1980 and joined the IRA in becoming a major source of personal retirement funds. Americans began to save for their own retirement years in a manner that was unprecedented before tax incentives existed. American retirement accounts increased.
Charitable Giving: Since 1917, the government thought it would be advantageous to encourage more charitable giving. This tax break translated to more money for churches and non-profit agencies because eventually both the rich and the middle class were able to reduce their taxes by adding charitable contributions to itemized deduction subtractions from taxable income. For most middle-class filers, that charity deduction tax break is gone. As a result, churches and charities have suffered; charitable gifts dropped $15.5 billion in 2018. Whether you are red or blue, Christian or Muslim, liberal or conservative, it is likely that your charitable donations now benefit only your sense of altruism, not your tax bill. Although giving has decreased since TCJA, in the decades before, governmental tax policies meant that American church donations increased.
Religious Families and Institutions Negatively Affected by TCJA
In addition to the loss of the personal exemption, the TCJA raised taxes on families who, through itemized deductions, reduce their taxes by owning a home and giving money to their churches. According to CNBC’s Darla Mercado, “during the 2018 tax year, [just] 16.7 million households took itemized deductions on their tax returns. That’s down from 46.2 million taxpayers during the 2017 tax year.” The percentage reduction since TCJA went from about 30% of itemizing taxpayers to about 10%.
As a tax preparer, I found that almost all of my clients could no longer itemize, which meant that their generous tithing to their churches and other worthy organizations no longer offered them a tax break. My clients are a devout, committed bunch whose tithing will continue, but they, like most of us, will probably cut back on the “extra” that we throw in here and there thinking “Well, we can take it off our taxes!” So in addition to the TCJA hurting taxpayers who truly live their religious values, those families don’t get to take tax deductions for the money they give to their church, nor can those living in high-state-income-tax states deduct their state and local income taxes.
A Lack of Understanding? Or Did They Know and Not Care?
How could family-friendly politicians vote to penalize the people they promised to serve? The senators and congresspeople who voted “yes” on the TCJA either (1) knowingly decided to hurt big families or (2) did so through a lack of diligence because they didn’t understand what removing the personal exemption and negating itemized deductions meant to the backbone of much that is America: its families. The TCJA was hurried through to the vote, but it didn’t have to be so rushed. And it could have been fixed soon afterward, once its unfairness became apparent, as Alan Viard writes. But it was rushed, and it hasn’t been fixed, so American families suffer financially, and American churches get fewer dollars.
What happened? Conservative journalist Ramesh Ponnuru writes in a Bloomberg opinion piece: “Republican politicians aren’t nearly as enthusiastic about a larger child credit as they are about corporate-tax cuts, reductions in the top income-tax rate.” In other words, these politicians pretend they care about family values but actually vote in ways that hurt the very families they claim to work for.
Examples of Hypocritical Senators
In my home state of South Carolina, our pair of childless, bachelor Senators, Lindsey Graham and Tim Scott, publicly use words that imply they look out for moms, dads, and kids (the real families in the term “family values”), but their votes for the TCJA say otherwise.
I searched the internet for vibrant speeches or persuasive writings from Graham and Scott with specific references to the importance of the American family, but I came up short. On his official website, Senator Scott posts that he regards “all life as sacred and am proud of our values and traditions,” but he doesn’t specifically tout the importance of supporting actual living, breathing families – like those who are trying to bring up three kids on a $26K teacher’s salary. A November 28, 2017 Twitter post from Scott baldly states that “every single bracket gets a tax cut - we see you, we hear you, and that's why #taxreform will help hardworking families keep more of their money at home.” Technically, all the “tax brackets” did get a cut, but the actual people didn’t; the ramifications of the TCJA code did not let families, hardworking or otherwise, keep more money at home.
Senator Graham’s official website makes no mention of families or his commitment to family values although his run-for-president website did say he supports “strong families, constitutional liberties, and the sanctity of life … on which our nation was founded.” His September 28, 2017 Twitter feed promises “Great #TaxReform plan in the making. Details will matter.” Evidently, details didn’t matter because the TCJA passed without the personal exemption intact.
Who Really Benefits from the TCJA?
Who profits from the TCJA? Businesses large and small all got tax cuts. Really rich people got tax cuts (more than 20% of the bill’s tax cuts went to the highest-earning 1% of Americans). It may be that the businesses and the rich people trickled down their extra money to you and your kids, but even if they trickled some, it didn’t come close to what $32,400 in personal exemptions would have given you in extra spending money for the past 3 years.
So who benefits from TCJA? Not you.
It’s time to bring back the personal exemption and let taxpayers get tax breaks for charitable contributions. Make your voice (and your vote) heard.
(*Note: If you are curious about the nitty-gritty tax-specific details of why the elimination of the personal exemption, read this article: “Mother Hubbard’s Crying the Tax-Kickin’ Blues: How the TCJA Hurts Your Big Family”).
Kathryn Hauer, a Certified Financial Planner ™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through murky and unfamiliar financial and career worlds. Read more on her website.