By: Jennifer Bird-Pollan
This week Republican presidential nominee Donald Trump released a series of proposals aimed, presumably, at improving his approval ratings among women. Much of the focus in reporting on this plan has been on the proposed six weeks of maternity leave that employers will have to make available to all of their female employees. Another element of the proposal is focused on mothers who do not work outside of the home. Trump’s plan offers a tax deduction for childcare expenses to all parents (including adoptive parents and foster parents) with children under the age of 13 living at home. In a unique twist, rather than having a uniform cap for the amount of childcare expenses taxpayers can deduct, the plan caps the amount of the deduction at the average cost of childcare in the state of residence. In another radical departure from current law, Trump’s childcare deduction would be available to stay-at-home parents who provide care for their own children in their own homes. In the explanation of this proposal Trump claims that allowing the deduction to be claimed by stay at home parents means the government would be allowing families to decide for themselves”what’s in a family’s best interest.” Further, the proposal claims that giving a deduction to stay home parents is “a belated recognition by the federal government of the economic value of the work provided by stay-at-home parents.”
This proposal might have significant political appeal, especially to stay at home parents who feel socially undervalued, but it demonstrates some basic misunderstandings of tax law and related theories of income. Most basic income tax law courses cover the subject of “imputed income”. Imputed income includes all the things one does for oneself, that don’t come in the form of cash, but that provide advantages to oneself. The classic example is the imputed rental income from owning one’s own home. If you own your own home, you do not have to pay rent to a third party. This makes you economically better off than another taxpayer who does have to pay rent. In order to reflect that economic advantage with regard to your tax situation, we could require you to report as income the economic value of the rent you would have to pay to rent your house from someone else. This would be treating you as though you were renting your home from yourself, and paying yourself rent. With your landlord hat on, you’d have to include in your income the rent you paid when you put your tenant hat on.
Another example of imputed income is uncompensated labor performed (usually by women) in the home. One of the most common (and most valuable) forms of this labor is child care. Assume that a person runs an in-home childcare center with room for three children, and that in exchange for caring for one child, the provider receives payment of $10,000 per year. If the provider takes in the full three children that would put the center at capacity, the provider will have $30,000 of gross income for the year. However, if the provider decides to use one of the spots to care for his own child, then he will take in only $20,000 in payment from others. As a result, he has $10,000 in imputed income, for the care of his own child. We could have a tax system that tried to tax imputed income, by treating the caretaker as though he paid himself $10,000 to care for his own child. Without such a system in place, caring for his own child in the childcare center gives the taxpayer the economic advantage of receiving childcare, while allowing him to report income of only $20,000. In this way, our taxpayer pays less income tax than he would if he took in three children to the center, earned $30,000 in income, and paid someone else to care for his child. While this example might clarify the point neatly, imputed income from childcare does not only arise if you run a childcare center from your home – any time a person cares for his own children he gives rise to imputed income.
The U.S. tax system does not tax imputed income. Work performed for oneself produces an economic benefit that goes untaxed. If Trump’s proposed system really wanted to recognize the economic value of work performed by stay at home parents, then that value should be included in the income of the parents performing the work. At that point, offering a tax deduction for the value would be appropriate. However, because the imputed income goes untaxed, offering a tax deduction for the work of a stay at home parent results in a windfall to the family, and further incentivizes second earners (usually women) to stay home to care for their children rather than work outside of the home.
One of the ways that second income earners (and in the 21st Century United States, those second earners are typically women) are disincentivized from working has to do with this lack of a tax on imputed income. Assume a woman is married to someone whose annual salary places him in the highest marginal tax bracket, currently 39.6%. Any income she earns will be taxed at that highest marginal rate, if they are married and file jointly. Let’s assume she is considering taking a position that would pay her a salary of $30,000 per year. Assuming no other deductions, she’d take home $18,120 after tax. Let’s assume our potential taxpayer also has two children, ages 2 and 4, both of whom will have to be cared for by someone outside of the family while their mother works. If our family lives in any major metropolitan area in the U.S., they will certainly have to pay more than $18,120 for a year of childcare for two children. Even here in Lexington, Kentucky, a year of full time daycare for one child costs about $10,000. So if our example mother’s decision is purely economic, she will choose not to go to work, but will instead stay home and care for her children. A tax deduction for the cost of childcare, however, especially if it fully offset the amount the family has to pay for the two children, might change this outcome. If she can take an above the line deduction for the costs of childcare, reducing her taxable income by the amount she pays to have someone care for her children while she goes to work, then there is an economic benefit to her choosing to work. Under Trump’s plan, even if our example mother chooses to forgo earning the taxable salary, and to stay home and care for her children, she will be entitled to a tax deduction. In this way, the economic benefits of staying at home with her children will be multiplied by the tax rate on her income earning spouse’s highest taxed dollar of income.
The difference between the mother who works outside of the home and earns taxable income, and the mother who cares for her child in the home, producing non-taxable imputed income, already results in a tax-motivated disincentive for working mothers. The mother working outside of the home must incur the costs of childcare in order to produce the taxable income she earns. The mother who works in the home caring for her child incurs no comparable expense, and has no comparable income subject to tax. Allowing the stay-at-home mother a deduction for a childcare expense she did not actually incur gives her an actual deduction for an imputed expense, while continuing to allow her to avoid taxation on the imputed income her labor produces. There is no theoretically consistent justification for allowing this deduction, while still failing to tax this income.
The problem of the tax code’s disincentive effects on working mothers is real, and proposals to address the problem should be applauded. While Trump’s latest plan claims to be offering a solution, a deduction for stay-at-home mothers will exacerbate the problem, creating additional economic incentives for women with young children to stay out of the workforce.
8 thoughts on “Imputed Income and Donald Trump’s Tax Deduction for Stay-at-home Moms”
I really enjoyed this. My one quibble: it seems as though the proposal fails to correct the imputed income incentive to stay home, rather than “creating additional economic incentives…to stay out of the workforce.”
Thanks for your comment! I think the new proposal actually goes beyond merely failing to correct the imputed income incentive. By offering a tax deduction for the non-taxed value of the imputed income produced by the stay at home parent, there are ADDITIONAL economic reasons to stay at home. With this deduction, the income of the working parent will be subject to less tax, since the joint return will include a deduction for the value of the stay at home parent’s child care.
I’m actually a little confused by the proposal—is it essentially an additional child credit (or rather, deduction), except one keyed to some kind of local prices? Because it looks like stay-at-home parents get it automatically (and, I guess, they get the full amount of the deduction?). And, frankly, two-worker families probably get it automatically, too, because they’re either paying for child care or trading off to take care of children or passing them off to grandparents or others, who appear to qualify. I mean, there’s no indication that the deduction takes into account actual costs incurred.
So, in spite of being called a child care deduction, it really looks a lot like an additional annual deduction for having children under the age of 14.
Of course, if that’s what it actually does, it should probably be framed as a deduction for having children, not a deduction for child care (that is divorced from the actual costs incurred by families for that child care).
You also forget that parents will lose personal exemptions for their kids. In many cases more than 4 kids that trump is proposing receive tax benefits. The arrangements people have to take care of their children should not receive criticism from people who don’t care for children and should also not be assumed that such arrangements by grandparents and whatnot are for tax purposes. The parent can justify their parenting chooses with out your opinion just fine. I work full time, as does my husband. We have 2 kids and my mother came to live with us when she retired and she watches them while we work. We aren’t “passing them off” to anyone. I never go out to do anything fun like those of you who have no child to obligate your life to. So here is my tax situation and how it could be affected if the child tax credit trump is proposing to ALL parents was limited to parents with only child care expenses.
Currently we gross 138,000 and that will be much higher when filing for 2016, but I’ll talk about my last return. With student loan interest taken off the top that came to 138, 276. Itemized deductions 25,276 (which is something I’m nervous about as my husband travels for work about 80 to 100 hours per week and we itemize every thing because it’s always about twice the standard deduction). That comes to 112,997. Personal exemptions for when we had 1 child, 12,000. Comes to 100,997. Tax table gives us that we owe 16, 837 in taxes. Add first time home buyer payment and additional medicare tax and that comes to 17, 356 in tax owed. We file married 0 allowances so we withheld 21,584. Our refund was 4,228. We use that amount annually for home improvement and things that need to be taken care of and we save half usually. With my second child our refund would have been 5,234. Granted we filed our w4 as if we had no children so we treat tax withheld as a yearly savings account. We also contributed the full 5,000 to dependent care fsa for day care for my first. So I’ll admit that helps with about 1250 on the refund. But what trump is essentially doing is punishing people for kids. I would have a Personal exemptions for each kid plus deduct up to 5,000 in child care expenses or roughly 13,000 total for 2, 9,000 for 1. I my state the average for dependent care is 5800 per year, so instead of 13,000 or 9,000 it would be 11,600 or 5,800. See how screwed up that is? And also for the childless without kids who itemize more than 22,000… it hikes their rate. For itemizing 25k they would originally deduct 8k in personal exemption and 25k itemized. Which is 33k. And under trump/gop that drops to 30k. Creating a donut hole for itemization in the reasonable range and will do nothing more than either hike tax or promote tax fraud to cover the gap.
Under trump/GOP estimated plan, our tax bracket would not change. Except that we wouldn’t trip into 28% at 150k. So with the new deal, it roughly looks like this (correct my math as needed please). 138,000 minus 30k standard deduction 108,000 minus no person exemptions. Using 2015 tax table, the tax would be 17,588 plus home buyer and additional medicare = tax is now 18,107. Refund is 3477 instead of 4228. Had I not claimed 0 allowances I’d be paying in about 700 to 800 more dollars for doing nothing but casting my vote for Donald trump.. who touted major major tax cuts for middle class hard working individuals such as myself but now my taxes will increase. For sake of simplicity of numbers of didn’t add in the dependent fsa. It’s as if that income were never there say my mom was staying with my oldest. Everyone has a different story and the tax reform needs to reflect a benefit for the maximum number of citizens as possible. Now if I were given a tax break of the 11,000 for trumps child deduction, I’d have just what he preached, a tax cut.
The biggest hurdle i see her is to balance the picture for the donut itemized in the 20 to 25k itemization range. If tax brackets are decreasing on a sliding scale that may help buy I’m still in the 25, maybe the lower end of the 25 but my bracket still hasn’t changed.
Good luck to you and everyone. But ill be damned if you think you know anything about taking care of kids and the arrangement a working parent chooses until you actually do it.
I would also like to point out that married and single individuals without children get a tax cut no matter what. So I really would not be getting to irate just yet. I do agree that the dependent care deductions needs to be retermed as this would reduce confusion for all and give people something else to talk about.
That’s a good question Sam! I couldn’t find any information indicating how the value of childcare provided by stay at home parents, or grandparents, or anyone else who provided free childcare would be determined. However, for parents who pay someone else to take care of their children, the amount they can deduct is capped at the average cost of childcare in the state of residence. If the cap is the average cost, then it must mean that some people will pay less than that amount, which will mean that they are not entitled to a deduction up to the cap, but are only entitled to a deduction up to the amount they actually paid. It might also be true that this ends up increasing the average cost of childcare. While the plan never says this explicitly, I assume that most people will treat the value of the stay at home parent’s services as equal to the average cost, thereby allowing them to take the maximum deduction.
Exactly and given my math above it should be that way. Given the plan to eliminate personal exemptions that must be offset some other way. And not just to those who pay for child care. Stay at home moms tend to stay at home many times because they can’t afford to work. So the economic implications of removing a personal exemptions and replacing it with nothing for a person who may already underemployed in the work force is not good. The equal opportunity policy is not glorifying a parent or kids, it’s being realistic about economics and the numbers involved. A mom staying home doesn’t get paid. Usually it’s not a glamorous life on 1 income especially for those who can’t afford day care. If it raises the cost of day care then so be it. Day care workers are paid substandard wage for the job they do. Society has moved to 2 earner households by norm. I often wondered when the dependent care crisis would be addressed. Those who don’t deal with it don’t see it. But it’s nearly as bad a problem as the health care crisis as it directly affects employment and productivity of the work force.
Furthermore an argument for kids, maybe biased, but someone has to pay your social security check and take care of you when you’re old.