Congress has already started debating what to do about the upcoming expirations of the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
Cuts and Jobs Act (TCJA) at the end of 2025. But before they decide, members of Congress should reexamine how all the moving pieces of the reform fit together. As part of a Tax Foundation blog series on the TCJA expirations, this post will review how the law’s substantial changes to family-related tax policies were not discrete or independent of each other, but instead intentionally packaged together. Understanding the design of and trade-offs in the TCJA’s approach will help inform the debate about whether to continue or further reform family-related policies after the 2025 expirations.
First, some background on how the three major family provisions changed by the TCJA—the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
, personal exemptions, and the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
(CTC)—functioned before the TCJA’s changes took effect in 2018.
- When a taxpayer filled out their 2017 tax return, they could reduce their income by either itemizing their deductions from a list of permittable costs, like mortgage interest, or by subtracting a single, set amount known as the standard deduction—$6,350 for single filers and $12,700 for joint filers.
- Taxpayers could further reduce how much income was taxed by subtracting exemptions of $4,050 for each filer and dependent, but those exemptions phased out for higher earners, starting at $261,500 for single filers and $313,800 for joint filers.
- And finally, taxpayers could reduce how much tax they owed with a tax credit for each qualifying child worth up to $1,000, but it phased out starting at $75,000 for single filers and $110,000 for joint filers.
The TCJA reformed these three provisions by consolidating them into a larger, more refundable child credit and a nearly doubled standard deduction, as described in the table below.
The Joint Committee on Taxation (JCT) estimated the suspension of the personal exemption would increase federal revenue by $1.16 trillion while the expanded standard deduction and child tax credit would reduce revenue by $690 billion and $474 billion, respectively. In total, the three changes were expected to reduce federal revenue by just $4.2 billion between 2018 and 2025, after which the provisions would expire and revert to pre-TCJA law.
Even though the budgetary impact was minimal, the consolidation had a substantial effect on the structure of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
. The elimination of personal exemptions for filers and spouses (previously worth $4,150 each) was more than offset by the expanded standard deduction, as it increased by the equivalent of $5,500 per filer. The larger standard deduction itself had a simplifying effect, as it made it more advantageous for taxpayers to take it instead of itemizing deductions. And for many taxpayers, especially low- and middle-income, the expanded child tax credit more than offset the loss of dependent exemptions.
In effect, the TCJA increased the benefit of family provisions for lower- and middle-income taxpayers and extended the benefit of the child tax credit higher up the income scale, resulting in the relatively more favorable tax treatment of families with children.
Since the TCJA’s reforms, the child tax credit was expanded further during the COVID-19 pandemic. The American Rescue Plan Act (ARPA) further increased the maximum credit to $3,000, provided an additional $600 for younger children, eliminated the phase-in and earnings requirement, and provided part of the credit in monthly installments. The ARPA changes were only in effect for 2021.
The 2021 changes ignited a debate about the CTC’s work incentives. As traditionally structured, the credit incentivizes work both by phasing in with additional income (which acts as a negative tax rate at certain income levels) and by requiring work in the first place, creating a “participation bonus.” Eliminating the phase-in and its earned income requirement thus increases marginal tax rates on income and removes the participation bonus, lessening the work incentives associated with the credit, even as it increases the benefits households with low or no income receive.
Most economists agree that removing the phase-in and participation bonus reduces work incentives. The disagreement lies in the magnitude of that effect, and the relative importance of decreased work versus increased government benefits. For example, Tax Foundation previously estimated that making the ARPA credit permanent would reduce hours worked across the economy by 38,000 full-time equivalent jobs, while other estimates have found much larger magnitudes.
Congress has also considered other changes to the CTC. Earlier this year, a bipartisan tax package passed out of the House proposed boosting the credit by inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value.
the maximum, increasing the amount of credit available as a refund over and above tax liability due, phasing the refundable amount in faster, and permitting taxpayers to use earned income from the prior year to calculate their refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC).
for 2024 and 2025. That package did not include changes to the other family-related provisions changed by the TCJA, and it has not been voted on in the Senate.
Looking forward to 2025, lawmakers are likely to face tighter budgetary constraints than they did in 2017, and the reforms to the family provisions offer a template of how lawmakers can meet those constraints: offsetting the cost of simplifications and tax cuts with less distortionary base broadeners. Accordingly, the TCJA’s changes to family tax policy serve as a reminder to avoid looking at tax reform provisions in a vacuum. As lawmakers revisit the TCJA, they should review how provisions fit together and interact with one another as they prioritize a new tax reform package that is simple, pro-growth, and fiscally responsible.
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