Taxation of the Family

1. Introduction

   1. Marriage benefits

   2. Marriage penalty

   3. Stacking effect: not financially smart for homemaker to enter workforce at lower salaries b/c first income pushes into higher MTR (“stacking effect”), and would also incur additional expenses (child care credit much less helpful than a deduction)

Allowances for Child care expenses

2. Neither child care costs nor commuting costs are treated as business expenses

3. §21 provides a credit equal to a percentage of a taxpayer’s child care expenses, if the expenses are “incurred to enable the taxpayer to be gainfully employed.” For a taxpayer with AGI of $15k or less, the credit is 35% of the credit-eligible expenses. The rate of credit is reduced by one percentage point for each $2k (or fraction thereof) by which AGI exceeds $15k, but the credit is never reduced below 20%. The credit rate hits the 20% floor at AGI of $43,001. Thus, for most taxpayers of middling incomes or above, the credit rate is simply 20%

   1. Expenses eligible for the credit are capped at $3k (credit is 3k*20%=600) for a taxpayer with one “qualifying individual” (generally, a child under the age of 13, or another individual unable to care for himself), and at $6k for a taxpayer with two or more qualifying individuals

   2. Problem 3 and problem 4 p759

      1. Draw the line of childcare between preschool and kindergarten. Reg. 1.21-1(d)

      2. Preschool- childcare expenses

      3. Kindergarten- education expenses

   3. Problem 5

      1. No, because you have to be paying the child care provider so that you can go to work.

   4. Problem 6

      1. No, because 21(d) in addition to the usual limitation of 3000 ceiling, you can’t claim credit eligible expenses more than your earned income. If you are a full-time homemaker, your earned income is 0, so you can’t claim the credit.

   5. Problem 7

      1. If a married couple, and one is a student, time spent being a student is deemed to be gainfully employed. For ceiling purposes the student is deemed to have an income of 500 per month.

      2. For a couple, only one can use this special rule. (so if both are students you still cannot claim credit)

4. Section 129

   1. §129 provides an exclusion for “dependent care assistance” received by an employee from his employer, if the employer has a qualifying “dependent care assistance program” (DCAP). The exclusion is subject to a ceiling of $5k, regardless of how many children the taxpayer has

   2. It does cover child care services provided in-kind, but its more frequent application is to cash reimbursements of employees’ child care expenses

   3. A taxpayer cannot use the same dollars of child care expenses to generate both an exclusion under §129 and a credit under §21; §129(e)(7) provides that any expenditure used to support an exclusion under §129 cannot be the basis of a credit under §21.

      1. E.g. DCAP 5k, Section 21 credit 3K, reduced by 5k=0

      2. DCAP 5k, Section 21 credit capped at 6k (two children), reduced by 5k=1k

   4. Problem 9 p761

      1. Single parent, 10k child care expenses

      2. Exclude 5k under 129

      3. Under 21(c) ceiling amount must be reduced by the amount excluded under section 129.

   5. Problem 10

      1. Two young children, 15k child care expenses

      2. Expected AGI 60k, mrt 25%

      3. Should participate in DCAP, then use remaining 1000 as credit

      4. Credit only: 6000*.2=1200

      5. DCAP+credit

         1. 5000*.25=1250 tax savings

         2. + 1000 (reduced ceiling by exclusion amount)*.2=200

         3. Total 1450

      6. There’s more: payroll tax saving 5000*7.65%=382.5

   6. Problem 11

      1. Same facts as 10, amount anticipated to spend on childcare is 9000, and only one child

      2. Choose DCAP: 5000*.25=1250 savings

Child tax benefits not based on expenditures

5. Exemptions

   1. §151 allows a taxpayer to claim one personal exemption for himself (two exemptions for a married couple filing a joint return) and an additional exemption for each dependent. The amount of the exemption is indexed for inflation; the exemption amount for 2013 is $3900. As used in this context, “exemption” is just another word for deduction. A taxpayer would generally be entitled to a §151 deduction equal to the inflation-adjusted exemption amount multiplied by the number of people in his household.

   2. §151(d)(3) phases out exemptions for upper income taxpayers. Lose 2% of exemption for every $2500 by which AGI exceeds phaseout threshold

   3. Example

      1. 310k AGI couple, 3 kids

      2. Exemptions 3900*5=19,500

      3. 310k-300k=10k (300k is the phaseout threshold)

      4. 10k/2500=4

      5. 4*2%=8%

      6. 19500*(1-8%)=17940 exemption only

6. Child tax credit

   1. The §24 child credit is in addition to, rather...

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