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)
Six personal exemptions at $4,050 each equals $24,300 subtraction (no more child tax credit)
Taxable income equals $41,700
Wide-Swath, Simplified Estimate of the Current Way (since 2018)
Married combined income/AGI $90,000
Standard deduction of $24,000 (2018 and after, likely adjusted up a bit each year) to subtract
If Married with four kids under 16
No (zero) personal exemptions to subtract; child tax credit of $2,000 times 4 equals a $8,000 subtraction
Taxable income equals $58,000
If Married with kids 16, 18, 20, 22 (older ones are in college)
No (zero) personal exemptions to subtract; child tax credit of $500 times 4 equals a $2,000 subtraction
Taxable income equals $64,000
In 2018 the TJCA taxed your family on thousands more of your hard-earned dollars, and even with adjustments in tax brackets will likely result in your big family paying more in taxes and having less to spend.
Here is another simplified example why the new tax law is hurtful to big families:
Very, VERY simplified! Family with 2 parents and 5 kids under the age of 17
Conclusion
Taxes are complicated, and I believe that most of our senators and congresspeople didn’t understand the ramifications of removing the personal exemption when they voted yes for the quickly constructed 2017 TCJA tax law. This misunderstanding has little to do with which side of the political fence you are on but rather a consequence of not being a tax-law-familiar person. Politicians who consider themselves “family-friendly” and who support “family values” would not have voted yes for the removal of the personal exemption if they realized what it meant to the families they represent.
Whether you are conservative or liberal, Republican or Democrat, or in between, most people in the U.S. think it is right to give a leg up to those people who are raising future generations of Americans. Look at what TJCA ended up doing to families and pester your elected representative to consider a change that benefits families of all sizes.
Let’s Bring Back the Personal Exemption!
*There was an old woman who lived in a shoe, had so many children she didn't know what to do, she gave them some broth without any bread, kissed them all fondly and sent them to bed. (Technically it was "the old woman who lived in a shoe," not Mother Hubbard, who actually went to the cupboard for a bone for her dog. But you get my point.)
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Kathryn Hauer, a Certified Financial Planner ™, adjunct professor, and financial literacy educator has written numerous articles and several books. 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 at her website.