Methodology & Assumptions
The Net Income Change Calculator (NICC) calculates a family's net income at 5 different earnings levels. The user specifies the starting earnings level and how much the earnings should change. The user also specifies all other key characteristics of the family. NICC applies the tax and benefit rules used in each program and each state and displays the results in both tabular and graphical form. The tax and benefit rules used in the calculations are the rules that were in place in 2012; that is the most recent year for which a full set of policy details (including state-level details for state income taxes and other programs with extensive state-level variation) was available.
Tax and Transfer Programs Analyzed by NICC
The tax and public assistance programs analyzed by NICC include:
- Federal income taxes
- State income taxes
- Payroll taxes (Social Security and Medicare taxes paid by the employee)
- Temporary Assistance for Needy Families (TANF)
- Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program)
- Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)
- Public or subsidized housing
- Subsidized child care through the Child Care and Development Fund (CCDF)
NICC also captures the impact of child support income on the financial consequences of an increase in earnings, and it captures the impact of child care expenses even for families not receiving a CCDF-funded child care subsidy.
Information about Earnings and Changes in Earnings
The user decides how earnings will change--due to a change in hours of work per week or due to a change in the hourly wage. (In some benefit programs, the hours of work per week can affect eligibility.) The user chooses only one of these factors to change; the other is held constant across up to five scenarios.
If a user tests a two-adult family, the user selects whether it is the man's or woman's earnings that will increase across the scenarios; if the user chooses that both members of the couple are employed, only the earnings or hours of the designated person will change.
For either hours per week or hourly wage (whichever the user varies), the user sets the lowest value to be tested and the increment to be tested. NICC applies that increment up to 4 times to create up to 5 scenarios to be tested. For instance, the user may want to start with a parent working 0 hours per week and increase by 10 hours in each scenario--resulting in scenarios of 0, 10, 20, 30, and 40 hours per week. The user gives a fixed value for whatever aspect of earnings is not being varied. For instance, if the user is testing the impact of increased hours of work, the user selects the hourly wage that will be used in all the scenarios. Results will only be displayed for scenarios where hours per week are <=60 and hourly earnings are <=$20.
Other Information the User Can Enter About the Family
The user defines the other key characteristics of the family, as follows:
Family structure information provided by the user:
- Type of family--single parent, married couple, unmarried couple
- Number of children (up to 5), and their ages (up to age 17)
- When the family is headed by a couple, whether the children are the children of just the woman or of both the man and the woman.
Other financial information provided by the user:
- Child support income paid on behalf of the children during the month
- Total (pre-subsidy) cost of child care used by the family during the month
- Value of financial assets (not including a vehicle); separate values can be given for the man and woman in the case of a two-adult family
- Value of vehicles (assuming each adult has no more than one car, and owns it in full); separate values can be given for the man and the woman in a two-adult family
- Total monthly rent (before any subsidy)
Program participation data provided by the user:
- For each assistance program, whether eligible individuals receive benefits from that program. Even if a family is eligible for benefits from a transfer program, it may not provide them with benefits for several reasons: (1) for programs that are not entitlements, funds may be exhausted or extremely limited (for example, in many cities there are long waiting lists for subsidized housing); and (2) families may not apply for benefits because they do not want to be dependent on government aid, do not wish to comply with the program rules, feel the benefit received would be relatively small, or may be unaware of the existence of certain programs. Very few low-income families actually participate in all the programs for which they are eligible.
Under some circumstances, the user is asked to enter additional information to correctly calculate TANF benefits.
- The number of months (up to 23) that the family has combined work and TANF
- In the case of a two-adult family in which the man is not the father of the children, NICC allows the user to decide if the man would choose to be included in the TANF unit in a state that provides such an option to stepparents and/or non-parent cohabiters.
Finally, in the case of an unmarried-couple family with children who are the children of both the man and the woman, the user is asked an additional question.
- If it is the father or the mother who claims the children on their tax return, for all purposes (dependency, Earned Income Tax Credit, Child Tax Credit). (See Endnote 1.)
NICC assumes that the level of earnings does not cause any change in the characteristics entered by the user, with the possible exception of the cost of child care. When the user chooses to vary a worker's hours per week across the five scenarios, the user can indicate the lowest number of hours at which paid child care is required and the total cost at both that number of hours and the maximum number of hours. For example, if the user is testing a single mother's income at hours per week of 0, 10, 20, 30, and 40, the user might indicate that the mother first needs paid child care at 20 hours per week, and that the total cost of child care is $200 per month at 20 hours per week but $400 per month at 40 hours per week. NICC interpolates between the high and low values to derive total child care cost figures for the intermediate hours levels.
If the user indicates that an eligible family chooses to participate in a particular program, the family will participate whenever eligible regardless of earnings level. In other words, even if the family is eligible for a high benefit in the first (lowest-earnings) scenario and eligible for a much lower benefit in the last (highest-earnings) scenario, the family will participate in all of the scenarios if the user has chosen that the family will participate in that program, as long as the family is eligible for any positive benefit. Note, however, that the family may stop being eligible for a program due to increased earnings.
Additional tax information that may be requested from the user:
- During some time periods, project staff may make available the ability to simulate an alternative set of federal tax rules. If that option is available, the user chooses between the current-law rules and an alternative set of rules.
Assumptions for Characteristics Not Entered by the User
The Calculator makes numerous assumptions about characteristics that are not entered by the user.
Assumptions about location and housing:
- The family lives in the largest county in the state. (Some TANF and CCDF rules vary across counties, and the fair market rents that help determine the value of a familyís housing benefit vary by county.)
- There are no other people in the household other than the one or two adults and the number of children specified by the user.
- The family either rents their home or lives rent-free; they do not own a home. (Note, however, that the state income tax calculations do not include the rentersí credits that reduce tax liability for some renters in some states.)
- The rent amount includes utilities.
- The number of bedrooms in the home (needed to estimate the value of a housing subsidy) is estimated from family composition. If the user specifies no children or one child, the family is assumed to need a 1-bedroom apartment; a family with 2 or 3 children is assumed to need a 2-bedroom apartment; a family with 4 or 5 children is assumed to need a 3-bedroom apartment. (Note that guidelines used by housing programs may assume that one person uses the living room as sleeping quarters.)
- The family has a telephone.
Assumptions about the adults:
- Adults are between the ages of 25 and 50. (Non-parent adults must be age 25 or older in order to receive the EITC.)
- The woman is not pregnant.
- No adult has a disability.
- No adult is a member of the Armed Forces.
- All people in the household are citizens of the United States.
- Any adult who is working is working for an employer (rather than being self-employed) and is covered by FICA taxes.
- A non-working adult is looking for work.
- Adults are fully compliant with all program requirements for all programs in which they participate.
- If the woman and man are cohabiting, they report the cohabitation to all programs.
- The family does not have any income other than the earnings or child support entered by the user. (NICC assumes that any financial assets are in non-interest-bearing accounts.)
Assumptions about children:
- No child has a disability or any special needs
- Children have no income or assets independent of their parents
- No adult has any children living elsewhere.
Assumptions for Calculating Taxes and Transfers
The calculations of each family's taxes and transfer benefits, at each income level take into account all of the information entered by the user as well as detailed federal and state policies and interactions across programs. Some additional assumptions are required for the calculation of federal and state income taxes, TANF, SNAP, WIC, public or subsidized housing, and CCDF-funded child care subsidies.
Federal and state income taxes:
- Married couples file a joint return.
- In a one-adult family, the adult files a single return if there are no children or a head-of-household return if there are children.
- In an unmarried couple, each adult files a separate return, and neither claims the other as a dependent. If there are no children, each files a single return. If there are children who are the children of both adults, the adult selected by the user to claim the children files a head-of-household return and the other adult files a single return. If the children are the children of only the woman, she files a head-of-household return and the man files a single return. (See Endnote 1 for more information.)
- All individuals take all tax credits and deductions to which they are entitled.
- No adults are dependents of anyone else.
- All tax units take the standard deduction. (In other words, NICC assumes that no tax units have sufficient deductions to itemize.)
- No adult contributes to an Individual Retirement Account (IRA) or has other adjustments to their income.
- No child is claimed on the tax return of any adult living elsewhere.
- No earnings are in a tax-free account such as a Medical Savings Account or a Flexible Savings Account.
- We do not model property tax credits or rentersí credits.
Also, note that local (county and/or city) taxes are not included in NICC's calculations.
- The family is considered a recipient (not an applicant) for determining eligibility and benefits. (Some states have somewhat different eligibility or benefit computation policies for families already receiving benefits vs. those newly applying for benefits.)
- The family has not received TANF long enough to be affected by any state or federal time limit. (See Endnote 2.)
- None of the children in the family was conceived after the family began receiving TANF, so no children are subject to a “family cap” in any state. (See Endnote 2.)
- Married couples have been married for more than 6 months. (Newly-married couples receive more generous treatment in some states.)
- In Wisconsin, adults who are not working are assumed to be "not job ready" and receiving a cash benefit through the W-2 program; adults who are working are considered job-ready for unsubsidized employment and therefore not receiving a cash benefit from TANF.
- NICCís TANF estimates include the cash aid to families that would be paid either through a state's federal TANF funds, the stateís "state separate program" (SSP) funds, or a stateís "solely state funded" (SSF) program.
- The calculations do not include transitional cash aid, paid in some states to families that have recently stopped receiving TANF.
Choice between TANF or child support:
- If the amount of child support that would be retained by the state exceeds the amount of TANF that a family would receive, the family is assumed to not participate in TANF in order to receive the full amount of child support paid by the non-custodial parent. (A family's real-world decision might also consider factors such as TANF activity requirements, the likely regularity of the child support income, and whether TANF enrollment confers eligibility for other benefits or services).
SNAP eligibility and benefit computation:
- When a man is living with a woman and children, he is assumed to purchase and prepare meals with the woman and children, and to apply for SNAP as part of the same assistance unit as the woman and children, regardless of whether or not he is the father of the children.
- As mentioned earlier, NICC assumes that familiesí rent payments include their utilities; thus they are not eligible for a separate standard utility allowance.
- As mentioned earlier, NICC assumes that the family has a telephone; thus, they are eligible for a telephone allowance.
- NICC assumes that a childless non-working adult who might otherwise be ineligible for SNAP under the special rules for "ABAWDs" (able bodied adults without dependents) is nevertheless eligible for SNAP, either because s/he lives in an area that is exempt from the limits due to high unemployment, or because s/he has not yet exhausted his/her available months of benefits. (See Endnote 3).
WIC eligibility and the value of WIC enrollment:
- WIC eligibility is assessed using the current monthís income and program participation; some families shown as ineligible could be eligible based on a “certification period” that began in a prior month.
- All women, infants, and children who are eligible for WIC based on their income or program participation are assumed to be at nutritional risk.
- All mothers of infants are assumed to be partially breastfeeding their infants. Therefore, the mother is potentially eligible for WIC throughout the baby's first year, while the infant's WIC benefit still includes formula.
- All individuals who would want to enroll in WIC are assumed to also enroll in Medicaid if they are eligible. (Medicaid enrollment confers automatic WIC eligibility.)
- Eligibility for Medicaid is assessed using the rules that were in place in 2012—prior to the passage of the Affordable Care Act. Individuals may qualify as eligible for Medicaid under various pathways, including: qualifying under “Section 1931” rules (eligibility standards for low-income families, at least as generous as a stateís rules for cash aid as of 1996); having family income under a certain percent-of-poverty; having family income under a “medically needy” limit. However, in applying medically-needy policies, we conservatively assume that families have no out-of-pocket medical expenses.
CCDF eligibility and benefits:
- The family is considered a recipient (not an applicant) for determining CCDF eligibility and copayments. (Some states have a higher eligibility threshold for families already receiving subsidies vs. those newly applying for benefits.)
- A non-parent cohabiter is never considered to be a member of the assistance unit for determining CCDF eligibility and copayments, and a stepparent is treated the same as a biological parent. (In reality, DC and North Carolina do not generally include step-parents in CCDF calculations, and New Jersey includes step-parents only if they are legally responsible for the children.)
- When copayments or maximum reimbursement rates vary by the number of hours that a child is in care, NICC assumes that a parent commutes for a total of one hour per day, and assumes that the parent of a school-age child works primarily while the child is in school.
- If a family receives a CCDF subsidy but the user has entered a total cost of child care exceeding the state's maximum reimbursement rate for center-based child care, NICC shows the excess as part of the familyís child care expense, in addition to any copayment. (See Note 5.)
- NICC assumes that unemployed parents have exhausted any eligibility for CCDF based on job search. (Some states allow limited CCDF eligibility for job search.)
Public and subsidized housing:
- If the user indicates that the family lives in public or subsidized housing, NICC assumes that the family first obtained the subsidy when their income was below the income limit in their area. A family shown as having a positive housing subsidy value at a particular earnings level would not necessarily be able to obtain public or subsidized housing as a new applicant.
- NICC does not allow a user to select public or subsidized housing as a benefit for a childless individual or couple. While some childless individuals/couples who are under age 65 and have no disabilities do reside in public or subsidized housing, many of them formerly had children living at home. Individuals who apply for housing help who are childless, under age 65, and without any disability are unlikely to obtain a public or subsidized unit, although such help is possible.
The Computer Program Performing the Calculations
The computer program performing the calculations is a modified version of the Transfer Income Model, version 3 (TRIM3). TRIM3 has been developed and maintained at the Urban Institute since the early 1970s, with primary funding from the Department of Health and Human Services (HHS), Office of the Assistant Secretary for Planning and Evaluation. TRIM3 is a comprehensive microsimulation model of the tax, transfer, and health programs affecting U.S. households. The model is primarily applied to large survey databases (most often, the Current Population Survey).
Using the information about the hypothetical family entered by the user, NICC creates a small database that can be processed by a special version of TRIM3. TRIM3 simulates the tax programs and the selected transfer programs under up to five earnings levels and returns the results to the NICC interface for display to the user. For more information on TRIM3, including the steps in the calculations for each tax and transfer program, see the TRIM3 project's website: trim3.urban.org.
The Tax and Transfer Rules Used in the NICC
NICC uses the tax and benefit rules that were in place as of 2012. In cases when a program's rules changed during the calendar year, the rules that are used are those that were in place for either the majority of the year or a particular point during the year.
NICC uses rules obtained from the following sources:
- Federal income tax liability: Federal 1040 form and instruction booklet. (See Endnote 4).
- State income tax liability: State tax forms and instruction booklets and Jon Bakija, Williams College. (See Endnote 4).
- TANF: The rules were obtained from the July 2012 data in the Urban Institute's Welfare Rules Database (WRD), funded by the Administration for Children and Families (ACF) within HHS. (See Kassabian, Huber, Cohen, and Giannarelli 2013.) When rules vary across area of the state, the rules for the most populous city/county are used. Click here for more information.
- SNAP (Food Stamps): Federally-established rules are the rules as of July 2012, from the FNS website and other federal sources. Rules for the treatment of vehicles in applying assets tests and rules for broad-based categorical eligibility are taken from a publication of the Food and Nutrition Service (See FNS 2013).
- WIC: Eligibility rules are from the FNS website and regulations. The value of WIC benefits uses the state-level average value per person-month in 2012, adjusted using the most recently-available data on relative food costs for each category of recipient (women, infants, and children). The value of an infantís WIC benefit is intended to capture the full value of the infant formula (not the discounted amount negotiated between the manufacturer and the WIC program).
- Public and subsidized housing: Rules for computing the familyís rental payment are from federal regulations. Fair market rents (used to estimate the value of the subsidy) are the 2012 fair market rents for the largest county in each state. Click here for a list of those counties.
- CCDF-funded child care subsidies: Eligibility and copayment rules are from information in the CCDF Policies Database, funded by HHS/ACF. (See Minton, Durham, Huber, and Giannarelli, 2013.) When rules vary across regions of the state, the rules for the most populous area are used. Click here for more information.
For an overview of key rules of the tax and transfer programs, click here.
For an overview of key interactions across transfer programs, click here. These interactions can result in a range of secondary impacts, in addition to the direct impact of a change in earnings or family characteristics.
NICC's Definition of Net Income
NICC defines monthly net income as follows:
Amounts that are either 0 or positive (increasing income)
Monthly earnings received by the family. Earnings may be $0 or positive in the first scenario, and will always be positive in the other scenarios
- Child support income:
Monthly amount of child support paid by a non-custodial parent (as entered by the user) that is received by the family, if any. (If the family receives TANF income, some or all of the child support may be retained by the state.)
- Federal EITC:
One-twelfth of the annual amount; $0 if the family is not eligible for the EITC
- TANF benefit:
Monthly amount received by the family; $0 if the family is ineligible or is eligible but not participating
- SNAP (food stamps) benefit:
Monthly value of SNAP; $0 if the family is ineligible or if eligible but not participating
- Monetary value of WIC benefit:
Total monthly value of WIC benefits across all people in the family receiving the benefit; $0 if no person in the family is eligible or if eligible but not participating
- Housing subsidy:
For subsidized households, the fair market rent of the apartment minus the copayment; $0 if the copayment would exceed the FMR, or if the family does not choose to receive the benefit
Amounts that may be 0, positive, or negative (either increasing or decreasing income):
- Federal income taxes, prior to the EITC:
One-twelfth of the annual amount. (This is a negative amount--reducing income--when the family owes taxes; it is a positive amount--increasing income--if the family is entitled to a refundable child tax credit that exceeds tax liability.) If there are two unmarried adults, the amount shown is the sum across the two tax units.
- State income taxes:
One-twelfth of the annual amount. (This is a negative amount--reducing income--when the family owes taxes; it is a positive amount--increasing income--if the family is entitled to a refundable credit that exceeds tax liability.) If there are two unmarried adults, the amount shown is the sum across the two tax units.
Amounts that are either 0 or negative (decreasing income):
- Payroll taxes:
The employee's portion of payroll taxes for Old Age, Survivors and Disability Insurance and Health Insurance-in other words, Social Security and Medicare taxes. If there are two adults and both have earnings, the amount shown is the sum across the two workers.
- Child care expenses:
The total monthly child care expenses paid out-of-pocket by the family. If the family receives CCDF-funded subsidies, this is the family's copayment plus any amount by which the total cost exceeds the maximum reimbursable amount established by the state. If the family does not receive subsidized child care, this will be the total value of the child care entered by the user.
Note that NICC's net income concept treats child care expenses and housing expenses differently. Because NICC assumes that housing expenses are unrelated to the earnings changes being tested, neither subsidized nor unsubsidized housing expenses are subtracted from income; instead, the value of a housing subsidy is added to income. However, child care expenses are subtracted from income. This ensures that when a parent increases her hours of work in a way that requires additional child care (or goes from not working at all to working) the user can capture the potential impact of the increased need for child care on family income, regardless of whether or not the family receives subsidized child care. Note that child care expenses will be $0 both when a family is not using child care and when a family is using CCDF-subsidized child care and is not required to pay any copayment.
1. More information about who claims the children:
Except in certain cases involving divorced or separated parents, federal law requires the same person to claim children for all purposes; one person may not claim the children as dependents while another person claims them for the EITC. A non-relative (such as a cohabiting non-parent partner) could legally claim his partnerís child as a dependent under some circumstances, but could not claim the child for EITC purposes. NICC makes the simplifying assumption that a non-parent partner never claims the children for tax purposes. In the case of two unmarried parents who live together with their children, NICC allows the user to test the impact of either parent claiming the children; the tax results will differ depending on the parentsí earnings. Note that whichever unmarried parent does not claim the children for tax purposes is prohibited from taking the childless EITC.
2. Assumptions concerning the length of time that a family has already received TANF
In general, we assume that the family has already received TANF for the either the number of months that the family has combined work and TANF (as entered by the user), or 2 prior months, whichever is longer. (Hawaii provides higher benefits in the first two months that a family receives TANF; NICC uses the lower benefits that are provided in the third and following months.)
If the user indicates that the family has combined work and TANF for a relatively long period, there is a small potential for inconsistency between the data entered by the user and the assumptions that no children are subject to a family cap and no units are affected by a time limit.
Concerning family caps, if the user indicates that the family has combined work and TANF for close to 2 years and the family includes an infant, that infant must have been born more than 10 months after the TANF case opened. In the 17 states with a family cap policy, that infant would be affected by a family cap; however, that would not be captured by this version of NICC.
Concerning time limits, two states permanently or temporarily stop or reduce TANF benefits after a period shorter than 2 years. Specifically, Connecticut imposes a lifetime limit of 21 months (unless recipients receive an extension), and Texas excludes the adults considered the most work-ready from the TANF unit for 5 years after 12 months of TANF receipt. NICC does not currently capture these rules; even if the user indicates that the family has already combined TANF and earnings for 23 months, NICC's results for these two states will not reflect the state time limits.
3. More information on SNAP benefits for Able Bodied Adults without Dependents (ABAWDs)
A childless adult who works fewer than 20 hours per week, with total earnings less than what would be earned by working 30 hours per week at the minimum wage, may be limited to 3 months of SNAP benefits within a 3 year period. However, areas with high unemployment are exempt. For fiscal year 2012, 45 states and DC were permitted to exempt all ABAWDS from the time limits. (See FNS 2011.)
4. More information on federal and state income tax computation.
NICC generally computes federal and state income tax liabilities and tax credits using mathematical formulas, rather than using the "tax tables" used by most taxpayers. Although the tax tables are based on the formulas, in some cases the results produced by the formulas differ from the values shown in a tax table by a very small amount.
5. Cost of child care above the maximum reimbursement rate
The total cost of child care entered by the user could exceed the maximum rate if the family uses additional arrangements other than the subsidized arrangement; or if the family has chosen a provider whose full charge exceeds the maximum rate. See Minton, Durham, Huber, and Giannarelli, 2013, for (1) data on which states sometimes or always require parents to pay the difference when the providerís cost for an arrangement that exceeds the maximum rate, and (2) statesí maximum reimbursement rates as of October 2012. (If a state uses different maximum rates for different “tiers” of providers, NICC's calculations use the maximum rates for the highest tier.)
Bakija, Jon, 2013. "Documentation for a Comprehensive Historical U.S. Federal and State Income Tax Calculator Program" November 11.
Food and Nutrition Service. 2013. "Supplemental Nutrition Assistance Program, State Options Report, Tenth Edition, August 2012."
Food and Nutrition Service. May 3, 2011. "Supplemental Nutrition Assistance Program (SNAP)-Able Bodied Adults Without Dependents Waivers for Fiscal Year 2012." Memorandum from FNS to regional directors of the SNAP program. http://www.fns.usda.gov/sites/default/files/waivers_2012.pdf
Minton, Sarah, Christin Durham, Erika Huber, and Linda Giannarelli. November 2013. "The CCDF Policies Database Book of Tables: Key Cross-State Variations in CCDF Policies as of October 1, 2012." http://www.acf.hhs.gov/programs/opre/resource/the-ccdf-policies-database-book-of-tables-key-cross-state-variations-in-ccdf-1 (For the full detail of the database, see http://www.researchconnections.org/childcare/resources/17048?q=ccdf+policies+database.)
Kassabian, David, Erika Huber, Elissa Cohen, and Linda Giannarelli. November 2013. "Welfare Rules Databook: State TANF Policies as of July 2012". The book and other data are available on the projectís website, http://anfdata.urban.org/wrd.