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Congress working on 'kiddie tax' fix for Gold Star Families

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Memorial Day, our annual remembrance of the men and women who died while serving in the U.S. Armed Forces, is just a week away.

Many members of Congress will be back home on May 27 taking part in Memorial Day ceremonies honoring military personnel for their ultimate sacrifice.

But before then, Senators and Representatives are focusing how to correct a provision in the Tax Cuts and Jobs Act (TCJA) that has caused some military heroes' families to face higher tax bills.

TCJA advocates, who hurried the Republican-written tax reform through Congress in late 2017, say the revisions to the so-called kiddie tax were designed simplify tax rules for child income.

That's true in some cases.

But a change in how some earnings of youngsters are now taxed also has meant major tax hikes for some Gold Star families.


What is a Gold Star Family?

Gold Star families are immediate relatives
of U.S. Armed Forces members

who died in battle or in support of certain military activities.
These relatives can be parents, sons, daughters,
brothers, sisters or other loved ones.

The term Gold Star was first used in World War I,
when families flew flags with stars representing
each loved one fighting in the conflict.

 

Unintended kiddie tax costs: Before the latest tax law change, military survivor benefits that went to a fallen service member's child generally were taxed at the parent's rate. Under the TCJA change, the Defense Department benefit now is treated as if it were a trust or estate.

How we got here is part of more than three decades of tax law designed to ensure that wealthy taxpayers didn't get an unfair tax advantage.

Back in a simpler tax day, one way to shelter investment income from a potentially high tax rate was to pass it on to someone in a lower bracket. Parents and grandparents tended to do this by putting their money into accounts in the names of their lower-taxed children or grandchildren.

That option changed with the creation of the kiddie tax in 1986's Tax Reform Act. Only a small portion of the transferred-to-a-child money was tax-free or taxed at the youngster's typically lower rate. But once the child's earnings passed a threshold (that's adjusted each year for inflation), the youngster's excess earnings were taxed at their parent's higher tax rate.

The kiddie tax has been tweaked since, notably as part of the Tax Increase Prevention and Reconciliation Act in 2006, which upped the youngsters' ages at which portions of the tax apply. But the framework remained the same.

Then came the TCJA, which taxpayers dealt with for the first time when filing 2018 tax returns this year.

Under this tax reform measure, a portion of an affected child's investment income now could be taxed at the rates paid by trusts and estates. This is costly because trust and estate rate brackets are compressed compared to the brackets for a single individual.

Gold Star Families are among those taking a hit under the kiddie tax estate rate revision.

Before the law change, the benefits were taxed at an average of 12-to-15 percent. Now some military families are finding their survivor payments taxed at the law's top income tax rate of 37 percent.

Legislative fix sought: Since the unintended Gold Star Family tax hike was first reported last month by the military website Task & Purpose, the outrage on both sides of Capitol Hill has been bipartisan.

In addition to universally slamming the unintended tax consequence for families dealing with the loss of loved ones, several members of Congress also took steps to reverse the adverse tax treatment.

Sen. Amy Klobuchar, Democrat from Minnesota and a candidate for her party's presidential nomination, wrote the Treasury Department, urging Secretary Steve Mnuchin  urged Secretary Mnuchin "to urgently assess options to prevent the harms created by this tax code change for Gold Star families."

Soon after sending that letter, Klobuchar joined her colleagues Sens. Bill Cassidy (R-Louisiana), Doug Jones (D-Alabama) and Pat Toomey (R-Pennsylvania) in introducing S. 1370, the Gold Star Family Relief Act.

Twenty-nine Senators signed on as original cosponsors when the bill was introduced on May 8. At last count (last night, May 19), the bill had 40 bipartisan cosponsors.

If enacted, the return to prior tax treatment of survivors benefits would be retroactive to the 2018 tax year, meaning families that paid unexpected tax bills when they filed this year could get their tax over-payments back.

The Senate bill is modeled on one introduced in the House a few days before (on May 2) by Rep. Elaine Luria (D-Virginia), a retired naval commander. Luria's Gold Star Family Relief Act, H.R. 2481 in the House chamber, has 108 cosponsors, again from both parties.

Path to law: While there's obviously enough support to change the unintended taxation of Gold Star children benefits, it's not yet clear how the relief acts will be handled by lawmakers.

One plan was to piggyback the military survivor/kiddie tax correction on the House's pending retirement legislation. That bill could go to the House floor for a vote this week. Or not.

Meanwhile, Politico's Morning Tax reported last week that that the TCJA Gold Star fix on the Senate side likely would be via unanimous consent, an expedited procedure that allows for quicker consideration of a measure, rather than as part of the Upper Chamber's retirement bill.

Whatever legislative route the bill takes, though, it's likely to happen soon.

Ideally, that would be this week.

That way, the fix would benefit both Gold Star Families who were hit with a higher tax bill this year and members of Congress who'll be meeting with them and other constituents over the upcoming Memorial Day break.

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