The Tax Benefits of Having an Additional Child

How much can a household save in taxes by having an additional child? It’s a surprisingly difficult question to answer. The taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. benefits from having an additional child depend on several factors: how much money a household makes, its filing status, and – most importantly – how many children are in the household already.

There are three major sections of the federal tax code that give benefits to households with children:

1. The dependent exemption, which allows households to exempt $4,000 of income for each qualifying child.
2. The Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CTC), which allows households to increase their tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. by up to $1,000 for each qualifying child.
3. The Earned Income Tax Credit (EITC), which allows households that work to increase their refund by up to $6,242, depending on their level of income and number of children.

Each of these three provisions is targeted to a different group of taxpayers. In general, the EITC is designed for low-income households, the CTC for low- and middle-income households, and the dependent exemption for middle- and high-income households. Because all three provisions vary depending on a household’s income and the number of children it has, it can be confusing for taxpayers to figure out how much tax savings an additional child will bring.[1]

However, it’s possible to calculate the typical benefits that households can expect to receive from having an additional child. The charts below walk through the tax savings that a typical married couple making under $60,000 can claim as a result of an additional child. (The savings are much easier to calculate for households with incomes over $60,000).

The first chart shows the tax benefits for a married couple having its first child, based on the household’s income:

As the chart above shows, the tax benefits for a married household having its first child vary widely depending on how much income the household makes.

• A household with $0 of income receives no tax benefits from having a child, because it does not qualify for any of the three major tax provisions involving children.
• Once a household begins to earn income, the tax benefits of having a first child increase rapidly, as the three major provisions kick in: first the EITC (at $1), then the CTC (at $3,000), and finally the dependent exemption (at $20,600).
• The maximum tax benefits for a first child go to households making around $23,630; these households can decrease their taxes by about $4,650 from having a child.
• Once a household’s income moves over $23,630, the EITC begins to phase out, leading to lower tax savings.
• By the time a household’s income is over $44,650, the EITC has finished phasing out. These households receive $1,600 in tax savings from an additional child: the $1,000 child credit and $600 from the dependent exemption (or $4,000 multiplied by the 15% tax bracket).

Generally, taxpayers receive larger tax benefits from having a first child than from having a second, third, or fourth child:

If you’re wondering why the chart above looks so messy, it’s because the EITC, the CTC, and the dependent exemption mesh with each other in odd ways. This leads to several unusual policy results:

• A household with an income of $50,000 receives a larger additional tax benefit for having a third child than having a second one.
• A household making $24,000 receives a slightly lower benefit for having a second child than a household making $23,000 or $25,000.
• Having a fourth child leads to no additional tax savings for families making under $23,000.

Ultimately, the tax benefits for additional children are somewhat arbitrary and random. Over the last one hundred years, the U.S. income tax code has grown larger and larger, with little attention paid to how the components interact. No one writing a tax code from scratch would create a set of tax benefits for families with children that look like the chart above.

Or, as one Treasury Secretary put it, “The nation should have a tax system that looks like someone designed it on purpose.”

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