Direct Cash Transfers and Tax Policy: Reporting Cash Transfers for Maximum Benefit to the Recipients
Unconditional direct cash transfers (DCTs) are supported by a vast national and international evidence base. They have been shown to have a positive impact on health outcomes, school attendance, child development, household spending, and poverty reduction (Morton et. al., 2020). For young people experiencing homelessness or housing instability, DCTs offer a promising approach for moving swiftly to safe, permanent housing and starting on pathways to independence. While a DCT can be an important source of support and financial safety net, there is currently no express exemption from income for DCTs, potentially impacting a young person’s tax burden. Ultimately, this could erode the net benefit of a pilot program and possibly produce new forms of inequality (Baker et al., 2020).
Currently, several cities and counties throughout the U.S. are considering DCTs as an intervention to end youth homelessness. Many are designing these interventions as a cash gift, structured so that the regular cash payment from a nonprofit to a young person experiencing homelessness proceeds from “detached and disinterested generosity” and “out of. . . charity or like impulses” (Commissioner v. Duberstein, 1960; Kahn, 2018).2 This paper analyzes this interpretation and current income exclusions in the tax code analogous to DCTs. There is not an explicit tax code section that directly addresses the tax treatment of DCTs. However, existing exemptions from income provide a framework for supporting the exclusion of DCTs from gross income, so long as the payments are not compensation for services, and are distributed out of detached, disinterested generosity to address a recipient’s financial need. Ideally, express federal and state legislative guidance will be forthcoming to direct revenue agencies, DCT providers, and fund recipients how unconditional DCTs should be treated.
Direct Cash Transfers and Tax Policy: Reporting Cash Transfers for Maximum Benefit to the Recipients. Jacqueline Lainez Flanagan. October, 2022
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