Whose Child Is It Anyway? The Ways & Means Definition Makes It Harder for The IRS To Know

To paraphrase Tolstoy, all simple families are alike; each complicated family is complicated in its own way. So when the tax code aims to deliver benefits for kids, expect complexity.

But the proposed monthly child tax credit (CTC) in the Ways and Means reconciliation bill reaches new heights. It would extend the expansions enacted in the American Rescue Plan through 2025 with some modifications—including temporary changes to the definition of a child.

The challenge is figuring out who gets the credit when a child spends part of the week with one parent and part with another, is being raised by a grandparent and an aunt, or is in the foster care system. It isn’t easy, but Ways and Means made it much more complicated than necessary.

Here’s one way to think of the difference between the current CTC and the Ways and Means version:  Eligibility for the current CTC, where up to half the 2021 credit is doled out monthly, generally is based on where the child lives for more than six months of a given year. Under the Ways and Means bill, the CTC still would be paid monthly, but eligibility would be partly based on criteria specific to each month.

While most of the new rules are consistent with past rules if applied monthly, one provision stands out: The specified child must receive uncompensated care from the taxpayer during the month. Compliance with the “care” test would be based on five factors specified in the bill:

  1. The supervision provided by the taxpayer regarding the daily activities and needs of the individual.
  2. The maintenance by the taxpayer of a secure environment at which the individual resides.
  3. The provision or arrangement by the taxpayer of, and transportation by the taxpayer to, medical care at regular intervals and as required for the individual.
  4. The involvement by the taxpayer in, and financial and other support by the taxpayer for, educational or similar activities of the individual.
  5. Any other factor that the Secretary determines to be appropriate to determine whether the individual receives care from the taxpayer.

Tiebreakers, based on adjusted gross income and the child’s relationship to the taxpayer, would sort out situations where more than one caregiver met those tests.

Those factors match nearly all our best hopes for the relationship between a child and caregiver. All that is missing is a requirement that the caregiver who receives the credit loves the child the most.

Of course, the Internal Revenue Service can’t measure love. But it’s not going to be any easier to verify those specified factors either, so Ways and Means would let Treasury sort it out.

I’m reminded of the early years of the CTC. Eligibility hinged on whether the taxpayer provided over half the kid’s support. Taxpayers could turn to a 24-line worksheet in the instructions to figure it out, taking into account such factors as who paid the child’s share of the household’s rent, utilities, meals, and repairs as well as the specific amounts spent on clothing, education, medical expenses, travel, and recreation.

The IRS didn’t verify any of this before paying the CTC, but taxpayers had to maintain detailed records in case they were audited. And those criteria were based on actual expenditures, unlike some of the new proposed factors.

Beginning in 2005, the support test was replaced with the requirement that the child live with the taxpayer for over half the year (with an exception for noncustodial parents). After a similar change and other modifications were made to the rules for the earned income tax credit in 1991, the EITC’s error rate dropped by 40 percent in less than a decade.

The six-month residency test isn’t perfect. The IRS still does not have that information before paying the credit. And taxpayers may not meet the IRS’s high standards for documenting the child’s residency throughout the year. As my TPC colleague Elaine Maag found, some children move from household to household during the year (say, between parents or among other relatives), further complicating determination of residency under the current rules.

The government could ease those challenges by relaxing documentation requirements, assisting taxpayers, and creating safe harbor rules.

The six-month residency test still might be inappropriate for determining eligibility for a monthly credit, which strives to match a family’s needs with their caregiving responsibilities in real time. So the legislation requires that the child live with the taxpayer for at least half the month.

That might work, but those other unmeasurable criteria are the real recipe for trouble. Just one example: In the case of duplicate claims for the same child, the IRS would have to make the kinds of decisions King Solomon avoided.

Aligning eligibility rules with social policy goals is important. But if the rules can’t be understood by taxpayers or administered by the IRS, or if the program is undermined by charges of improper payments, it will fail despite its best intentions.

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