House Democrats don’t just want to expand their signature Child Tax Credit payment program, they also want to redefine what it means to be someone's child.
As part of their sweeping reconciliation plan, they are proposing to overhaul, for the first time in almost a generation, the legal definition of a child that’s used to claim the hugely popular break. But that's not as simple as it sounds, and implementing it could become a bureaucratic nightmare.
Lawmakers want to make the definition more expansive, so that more people can claim the benefit worth up to $3,600 per child. They’re proposing to dump long-standing rules requiring a child to be a relative of the person taking the credit.
Instead, they want to award the money to whoever is caring for the child, regardless of whether they’re related.
That’s designed to be more flexible and to accommodate people in a wider variety of living situations — researchers say hundreds of thousands of kids are currently ineligible for the benefit because they live with, say, a family friend.
"Nobody can claim kids who are being raised by someone who is not a close relative — those kids just get cut off from the break entirely,” said Jacob Goldin, a former Treasury official who now teaches at Stanford University’s law school.
But some warn what Democrats are proposing would be complicated and difficult for the already beleaguered IRS to enforce.
It could also be confusing to taxpayers because lawmakers would not change the definition of a child used for other tax benefits such as the Earned Income Tax Credit — forcing people to navigate multiple tax definitions of a child.
The proposal is a part of a giant package of tax and spending changes approved last week by the House Ways and Means Committee.
Much of the attention to Democrats’ reconciliation plan has focused on their call for $2 trillion in new taxes on high earners and corporations and plans to extend their new monthly Child Tax Credit payment program beyond this year.
Created earlier this year, the program is now sending monthly payments worth up to $300 per child to 35 million families.
But Democrats are also proposing a number of changes in how the credit program would work, one of most significant of which deals with the definition of a child.
Lawmakers have periodically battled over how to define children for tax purposes, which affects people seeking not just the Child Tax Credit, but also the EITC, a dependent care break and head-of-household filing status.
Congress hasn’t made major changes in the area though since 2004, when, amid complaints the tax code had too many conflicting definitions of a child, lawmakers tried to create a more uniform standard.
The current rules recognize that not every child lives in a traditional nuclear family and don’t require someone to be a parent in order to take the credit. But they stipulate the child must be a relative, with a list of accepted relations that includes sons, daughters, foster children, brothers, sisters, nieces, nephews and grandchildren, among others.
The child also must live with the person claiming the credit for more than half the year.
But there has been growing attention to those left out of that formula.
People at the bottom of the income ladder — the main target of Democrats’ Child Tax Credit initiative — are more likely to have idiosyncratic living situations, researchers say. About 330,000 kids don’t qualify for the monthly payments because they live with a cousin or neighbor or someone else the IRS says isn’t a close relative, Goldin estimates.
“The kids who get excluded under the current relationship test are a lot of the kids who would benefit most from receiving the financial benefits of the CTC,” he says.
Beginning in 2023, House Democrats would drop that rule.
In its place, they’d require people claiming the benefit to be someone who provides uncompensated care for a child, including supervising their daily activities. That would also include maintaining a “secure environment” in which the child lives; arranging for their medical care; and being involved in "financial and other support" for education "or similar activities of the individual.”
In addition, a child would no longer have to live with someone for more than half a year to qualify. Under Democrats’ plan, that residency requirement would be calculated monthly, so children would only have to live with a person for more than half a month to qualify for that month’s payment.
Some children live different places over the course of a year, and Democrats’ plan would allow multiple people to take the credit for the kid, although not at the same time.
Lawmakers would also have the IRS set up a system to settle disputes when more than one person claims the same child.
A spokesperson for Ways and Means Committee Chair Richard Neal (D-Mass.) did not respond to requests for comment.
Janet Holtzblatt, a former Treasury official who helped develop the current child definition, sees trouble ahead for the IRS should the plan become law.
The agency will have difficulty policing the break, she predicts, because it is poorly equipped to determine “nebulous” things like who is supervising a child or whether he or she is living in a secure environment.
And it may also be hard on beneficiaries who get audited because they will have trouble proving to the IRS that they were ones who, for example, took the child to a doctor.
"It can be more advantageous in these complicated family situations, but it's also going to be burdensome for the taxpayer to establish, if called in for an audit, to demonstrate they meet these criteria," said Holtzblatt, now at the Washington-based Tax Policy Center.
“I get what [Democrats] are trying to do and, from a social welfare perspective, maybe they’re on the right track,” she said. “But from a tax administration perspective, I think the disadvantages outweigh the benefits.”