The TCJA’s Tax Benefits for Parents Are Shrinking

The TCJA was designed to both simplify and cut individual income taxes. It did so by eliminating certain deductions, consolidating like-minded provisions, and reducing tax rates. For most taxpayers, tax cuts outweighed the loss of certain tax benefits elsewhere: an estimated 80 percent of taxpayers saw tax reductions in 2018.

One example of tax benefit consolidation in the TCJA is the tax treatment of children. Prior to the TCJA, the tax code offered both a deduction (dependent exemptions) and a credit (CTC) for most children. The TCJA consolidated these tax preferences by first repealing dependent exemptions, then expanding the CTC—both in terms of maximum value (which rose from $1,000 to $2,000) and overall reach (the income limit for married parents rose from $110,000 to $400,000). In other words, the TCJA traded dependent exemptions for a more generous CTC.

For parents, the value of this exemptions-for-CTC trade depends mostly on income. On one side of the ledger is the loss of dependent exemptions, which were scheduled to be $4,150 per child in 2018. Like all deductions from taxable income, exemptions only generate tax savings if a taxpayer has positive taxable income to offset, and because the income tax system is progressive, the tax savings from deducting $4,150 grow with income.¹ 

Credits, on the other hand, reduce tax liability dollar-for-dollar. Some credits are refundable, meaning that they can be claimed even if credit value exceeds liability—a common situation for lower-income families who owe little or no income tax. The CTC, under both its pre-TCJA and TCJA designs, is partially refundable. For parents who don’t earn enough to owe much in taxes, a portion of the credit is available as a refund based on income earned from working. The practical effect of this phase-in design is that while most bottom-quintile families benefited somewhat from the TCJA’s CTC expansion, that benefit was less than the full $1,000 per child tax cut available to middle- and upper-middle-income families. This is especially true for low-income families with multiple children.²

How these design features interact with the real-life distribution of parents’ income is an empirical question—one that we can answer with our tax microsimulation model. We estimate that 91 percent of parents in 2018 were made better off by the exemptions-for-CTC trade, and that the average tax savings was about $400 per child.³ Figure 1 below decomposes the net impact by provision across income groups, underscoring several distributional takeaways:

• For low-income parents, the net benefit was smallest. Exemptions did nothing for those with no taxable income to begin with, but the CTC’s phase-in provision—sometimes referred to as a “work requirement”—means that only a fraction of the larger credit was made available to them.  
• Middle-income families lost about $500 per child in exemptions but gained the full $1,000 CTC increase.
• Upper-middle- to high-income parents saw larger dollar-amount net benefits. This is because these taxpayers were phased out of the pre-TCJA CTC design, so their increase in CTC under the TCJA was more that $1,000 per child. But this group faces higher marginal tax rates and felt the loss of exemptions most intensely.
• For those at the very top, the trade was worth $0. both CTC and exemptions phased out entirely when income exceeded an income threshold.⁴

Our simulations show that extending the TCJA’s child-related changes would have more muted benefits for parents than it did when first enacted in 2018, on average. But that difference between effects in 2018 and 2026 varies with income—and is even positive for some points in the income distribution. This underscores an important point about tax policy design: if left unindexed to inflation, the real burden of taxes will shift over time, often in subtle or unintuitive ways.