Urban Wire As families become more complex, so does filing taxes
Elaine Maag
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The American family has undergone dramatic changes over the past 50 years: the tendency for two young people to marry, have children, and stay together has given way to delaying marriage, divorce, or living together without getting married at all. About 40 percent of births each year occur outside of marriage and a substantial share of parents have children from more than one relationship.

Along with these changes in family structure, the traditional safety net has also shifted towards providing assistance through the tax system. Every year, the federal government directs over $170 billion in tax benefits toward families with children. By one estimate, tax benefits account for 40 percent of federal public investments in children. Annually, over 90 percent of families with children benefit from the earned income tax credit, the child tax credit, the dependent exemption, head of household filing status, or the child and dependent care tax credit.

But the basis for providing this assistance in the tax system, a tax unit, has not kept pace with changing families. A typical tax unit includes an adult (with their married partner, if they are married) and the children they live with for more than half the year. As a result, determining who ought to receive benefits on behalf of a child has grown increasingly complex, which makes both tax filing and tax administration complicated.

Not all families fit a standard “tax unit”

For traditional families, the tax unit does a good job of funneling benefits in the right direction. But if children live with unmarried adults, adults in multiple generations, or move between homes as a result of a custody arrangement or necessity, the tax unit may capture only some people who support the child.

For example, parents who live apart but each provide support for a child will come up short when it comes to claiming tax benefits—one won’t qualify. The exception is when special rules for divorced or legally separated parents are used to allocate some benefits, an option not available to cohabiting parents or parents who were never married.

Multiple tax units, including parents who live apart or grandparents, may support a child in a non-traditional family—and these families are most likely to have parents and children moving in and out of the household over the course of the year. These families must sort through a complex residency test to determine who qualifies for the tax benefits. For children moving between homes, either in a shared custody arrangement or out of necessity, their families are unlikely to have documented where the child spent each night. Yet, the IRS distributes tax benefits based on proof that a child lived with one parent for more than half the year.

Which parent gets to stake the claim?

Children or parents from low- and moderate-income non-traditional families are most likely to have moved in or out of the household from year to year. This makes it difficult for families to use a prior year’s tax return as a template for the current year.

Finally, the winner-take-all nature of these tax benefits creates a huge incentive for people related to a child to race to file taxes in order to claim the child first, a phenomenon noted by Francesca Jean Baptiste at a recent Tax Policy Center panel. This complicates filing for other relatives who try to claim the child. The IRS will usually deny duplicate claims and disputes are likely to significantly delay a taxpayer’s refund.

Tax benefits for children can provide a substantial lift for families, but for people living in the growing number of non-traditional families, these benefits can be complicated to claim and difficult for the IRS to administer.

Research Areas Taxes and budgets
Tags Family structure Individual taxes
Policy Centers Urban-Brookings Tax Policy Center