Child Tax Benefits and Children with Complex or Dynamic Living Arrangements

Child Tax Benefits and Children with Complex or Dynamic Living Arrangements

INSIGHTi
Child Tax Benefits and Children with
Complex or Dynamic Living Arrangements
March 12, 2021
The federal income tax system provides substantial amounts of cash assistance for many families with
children, often in the form of refundable tax credits. The two largest benefits for families with children
(and workers) are the earned income tax credit (EITC) and the child tax credit. To claim these benefits,
tax filers and children have to meet numerous requirements.
Policymakers have recently expressed interest in providing additional cash assistance to families with
children, often in the form of tax benefits. In the 117th Congress, Congress passed the American Rescue
Plan Act of 2021 (P.L. 117-2), providing a larger child tax credit that is issued on a periodic basis
throughout the year (i.e., advanced) instead of as a lump sum when income tax returns are filed.
Tax rules for claiming children for benefits do not align with the lived experience of some families in the
United States, which may lead to confusion for these families and administrative issues for the Internal
Revenue Service (IRS). Family living, caregiving, and financial arrangements can be intricate; a family’s
understanding of shared childrearing (and therefore what they may perceive as reasonable when claiming
children for tax purposes) may not match the tax code’s extensive set of rules for qualifying children (link
requires paid subscription). Some children have more than one individual who is eligible to claim them;
others may have no one. Many children move between different living arrangements in often unforeseen
ways from year to year or on a more frequent basis. Children who experience these forms of family
arrangements are also disproportionately likely to be from economical y vulnerable backgrounds.
As a result of the incongruity between children’s living arrangements and current tax rules, certain policy
aims for the tax system such as limiting burdens on tax filers, encouraging tax compliance, and reducing
child poverty may be hampered in practice. Various policy design and implementation choices can affect
the extent to which tax benefits readily aid children. This Insight provides an overview of the living
arrangements of children as they relates to key tax provisions.
Complex Family Arrangements
Many children receive significant financial, caregiving, and other forms of support from parents, extended
family, or nonrelative kin who may or may not share a residence with them. The tax code, on the other
hand, general y al ows only one adult or married couple to claim tax benefits for children that are related
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to them (a relationship test), live with them for more than half the year (a residency test), and meet certain
other requirements (e.g., a child age test). General y, benefits for a child cannot be divided between
multiple tax filers. In cases where multiple individuals may be eligible to claim a child, tiebreaker rules
specify which person can claim the child.
One notable issue is that some children may be ineligible for child tax benefits because they do not live
with their parents or any other relatives. To meet the relationship test, current law requires that the child
must be the tax filer’s biological relative, adopted child, or eligible (i.e., formally placed) foster child. In
practice, living arrangements involving non-relative kin are often determined informal y.
The disconnect between contemporary family norms and current tax rules likely contributes to the
substantial chal enges associated with taxpayer compliance and IRS administration with respect to various
child tax benefits, as discussed by academic researchers (link requires paid subscription), the Government
Accountability Office, former National Taxpayer Advocate Nina Olson, and analysts affiliated with the
U.S. Department of Treasury (read a synthesis paper and data analysis).
Research finds that a child’s likelihood of experiencing family complexity tends to be greater for children
who are Black or from less-advantaged socioeconomic backgrounds (as measured by parental education
or family income). Many of these children also experience higher levels of instability in their living
arrangements (discussed next).
Dynamic Living Arrangements
Classifying where a child is living for a given month or year to meet a child tax benefit’s residency test
can be particularly chal enging when children alternate between multiple households on an ongoing basis.
For example, divorced and separated parents are increasingly likely to legal y share physical placement of
their children, including cases where children are expected to spend an equal number of nights with each
parent. A child’s caregivers, including parents, other relatives, and non-relatives, may also informal y
establish arrangements in which children regularly alternate between households for extended periods of
time. The complexity of these arrangements helps explain why, for example, a sizable share of separated
mothers’ and fathers’ reports of their child’s primary residency are inconsistent with one another in survey
research (link requires paid subscription).
Final y, for children with dynamic living arrangements, advancing child benefits on a periodic (e.g.,
monthly) basis may also pose chal enges. Studies drawing on different data sources and methodologies
estimate that one-third, or perhaps closer to one-half, of U.S. children experience a change involving a
parent entering or leaving their household over the course of childhood. (There were more than 72.9
mil ion children under age 18 in 2020.) About one-third of children are estimated to have lived with
nonparent, nonsibling relatives at some point during their childhood. One study estimates that 2.1 mil ion
children (almost 3% of al children) experienced a transition in parental presence or the presence of a
parent’s partner in the household during a single year (2017). Another study estimates that about 5% of
children (younger than age 15) experienced a change in the presence of a parent over a two-year period
(2008-2010). Approximately 10% of children in the study experienced a change in the coresidence of a
nonparent, nonsibling relative over the same period. A third study estimates that 8% of children
experienced a change in family type annual y (between 2008 and 2012), with family type defined as
either a married couple, a single parent, a cohabiting couple, or relative/foster care. In short, some
families may be unable to anticipate who wil be eligible to claim a child in the future, and benefits paid
based on past information may not reflect a child’s current living arrangements.

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Author Information

Patrick A. Landers
Margot L. Crandall-Hollick
Analyst in Social Policy
Acting Section Research Manager

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