Head of household status is an imperfect way to support children

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Larger child benefits are a much better way to support children than tax benefits for unmarried parents.

Last week, Republican Senators Mitt Romney of Utah, Steve Daines of Montana and Richard Burr of North Carolina unveiled their proposal to extend income support to American families with children. As policymakers weigh proposed changes to plan benefits and accompanying payments, one provision they should take seriously is to incorporate the existing benefit of Head of Household (HoH) filing status into such a package. .

Presentation of HoH

HoH filing status reduces the tax liability of unmarried people caring for a dependent. Prominent voices on the left and right called for the filing status to be scrapped as part of a wider overhaul of Child Benefits. The broad ideological appeal stems from the misconception of the HoH statute. Not only does this disproportionately benefit the wealthy and ignore the number of children in a household, it also discourages marriage and unnecessarily increases the complexity of the tax system.

Head of household status reflects outdated policy design principles. HoH was established in 1951 with the stated aim of providing assistance to single parents with children. At the time, financial support for families was provided through a combination of regressive tax benefits such as deductions and exemptions, as well as means-tested social assistance for the poor, such as Help for families with dependent children (AFDC) support program for inactive single parents. In recent years, policy makers have generally preferred to extend aid to children through the Earned income tax credit (EITC) and Child tax credit (CTC), established in 1974 and 1997 respectively. This move towards per-child rather than per-household allowances reflects international trends. For example, the The UK completed the shift in the 1990s.

HoH is regressive

As shown in the table below, the HoH advantage is extremely regressive. For ordinary income, the HoH benefit provides an enhanced standard deduction ($6,450 increase over singles in 2022) and allows second and third marginal tax brackets to kick in at higher income. For parents with the lowest incomes, the structure of HoH offers quite modest relief from the one-time filing, as they would have little or no tax to pay anyway. But this situation changes dramatically as incomes increase. Deductions, unlike credits, reduce a fixed amount of pre-tax income. They are worth more as filers move into higher marginal tax brackets (the $6,450 deduction is worth much more when each dollar is taxed at the top rate of 37% rather than the 10% rate of the bracket). lowest tax). Delays to the point where higher tax rates take effect are also poorly targeted because of the way they exclude low-income households. This regressive structure results in HoH Child Benefits peaking at a value slightly after the Child Tax Credit has already started to fade.

Filing head of household status also benefits single parents by extending lower tax brackets on long-term capital gains. Long-term capital gains taxes are applied to profits from the sale of assets (housing, stocks, cryptocurrencies) held for more than one year and have lower rates than those applied to ordinary income . Yet only the Top 1% of filers in a given year will even realize enough long-term capital gains to meet the tax (and benefit from its relatively lower rate). Providing tax benefits to children on a regressive basis makes little sense, as parenthood puts greater pressure on low-income households. The fact that head of household status currently does exactly that therefore reflects poor policy design.

HoH discourages marriage

Head of household status incorporates a marriage penalty into the US tax code. Marriage penalties in the tax code arise when the combined value of tax credits and deductions for two single people arbitrarily decreases when those same people marry and file their taxes jointly, discouraging legal marriage. Since married couples do not receive additional tax benefits similar to HoH for having children, a single filer and a HoH filer with roughly equal incomes may be taxed at a lower rate than if they married. married. By comparison, the current CTC does not discourage marriage in the same way, as the elimination threshold for married households is equal to that of two single people, and the benefit is granted per child.

HoH ignores multiple children

Since the HoH is issued based on the parent’s marital status rather than the number of children in the household, this highlights another problem with the structure of the benefit: the HoH does not take financial constraints into account. increased associated with having multiple children. While the HoH tax benefit provides an income boost to eligible households upon the birth of the first child, the birth of subsequent children yields no additional benefit. As long as their incomes are equivalent, a HoH-eligible household with six children enjoys just as much tax status as a household with one child. Consequently, the HoH has the effect of discriminating against large families in relation to a benefit per child.

HoH is an unnecessary source of complexity in the US tax code

Finally, the continued existence of the HoH tax benefit creates complexity for families filing their taxes as well as administering tax authorities. What exactly “head of household” means is not simple or intuitive without prior knowledge of the US tax code. A wrong choice of filing status, resulting in underpayment or overpayment of taxes, is common, according to the IRS. Removing the status of head of household would be a necessary first step towards the complete elimination of separate tax filing statuses, as many other countries have done.

Complementary and Alternative Reform Options

Support for children is best channeled through benefits per child. Policymakers wishing to address the challenge of childcare expenditures for single parents might better focus their attention on reform and increasing funding for the Child Care and Development Block Grant. Policymakers worried about the impact on caregivers of adult dependents might consider offering a non-refundable tax credit per dependent.

Finally, if policy makers, for whatever reason, were to determine that lone parents are doing unacceptably well under an expansion of child benefits that folds back to head of household status, it would be It would be preferable for policy makers either to further increase the value of the allowance per child or to provide a sufficiently large “family bonus” to the earned income tax credit. These changes would allow low-income households to be even better off, regardless of their marital status. However, if policymakers were unwilling to do away with HoH altogether, the best option would be to convert head of household status to a one-time, non-refundable credit worth around $800. A credit of this amount would replace any loss at the lower end of the income scale while preserving most of the benefits of giving up separate tax filing status.

Conclusion

Headship status is not only distributionally regressive and insensitive to family size, it also penalizes marriage and unnecessarily complicates the US tax system. Filing status should be repealed to fund larger per-child benefits. The status of head of household is set to be scrapped in hopes of a broader package of child benefit reforms.


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