Mother Hubbard’s Crying the Tax-Kickin’ Blues: How the TCJA Hurts Your Big Family

When Congress reformed taxes in 2017, a stated goal was to reduce taxes for families. Did it? In many cases, especially for big families, it did not. Do you have a big family? If so, you probably noticed that the tax reform bill of 2017 didn’t help you. Here’s what happened.

What is Adjusted Gross Income (AGI)?

When you do your income taxes each year, you add up the money you made in that previous year – technically called your “Adjusted Gross Income” or AGI – and you have to pay income taxes on that money. You get to subtract a few things from the AGI that let you pay less tax.

The Personal Exemption (Gone But Not Forgotten)

One of the things we’ve gotten to subtract from our AGIs (since 1913!) was a dollar amount called a personal exemption. The personal exemption is an amount you get to subtract for each member of your household. The amount of the exemption was huge relative to income back in 1913 and let a lot of people off the hook from paying any taxes. The exemption amount decreased to help generate money to pay for World War II in the 1940s but has stayed reasonably steady since then. Until 2017.

The new tax law that was adopted at the end of 2017, the Tax Cuts and Jobs Act (TCJA), changed a few things, including the removal of the personal exemption. In other words, the TCJA won’t let you subtract from your income about $4,000 per person in your household. That means that if you have a lot of kids, you are probably paying more total taxes as a result of TCJA than you did before, even though the tax percentage brackets were adjusted down in the legislation as compensation for removal of the personal exemption.

Unfair to Big Families

This tax change becomes even more gallingly unfair 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 a credit called the Child Tax Credit. Before TCJA, we had a $1,000 per child Child Tax Credit plus a personal exemption for each kid. The TCJA increase in the Child Tax Credit to $2,000 per kid helps offset the loss of the personal exemption, but since the Child Tax Credit is $2,000 (in 2020) 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), losing the exemption with a non-commensurate raise in Child Tax Credit certainly isn’t equivalent.

Parents can claim their kids as dependents 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 years if your kids go to undergraduate and grad school though age 24).

Examples

Why do big families suffer disproportionately? Some examples follow.

Wide-Swath, Simplified Estimate of the Old Way (for like 100+ years of American tax-paying)

Married combined income/AGI $90,000

Standard deduction of $12,000 (2017 and before) to subtract

If Married with four kids under 16

Six personal exemptions at $4,050 each equals $24,300 subtraction plus 4 child tax credits of $1,000 equals a $4,000 subtraction

Taxable income equals $49,700

If Married with kids 16, 18, 20, 22 (older ones are in college)