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Bring Back the Personal Exemption: TCJA Tax Reform Hypocrisy

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 However, they also repealed a tax break called the “personal exemption,” which, in simple words, lets you subtract (in 2017) $4,050 for every person listed on your tax return.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%.