Students face unexpected tax hike on scholarship money
Wednesday, May 22, 2019
Gold Star families aren't the only ones facing unexpectedly higher taxes under kiddie tax changes in the Tax Cuts and Jobs Act (TCJA).
Some students who receive college scholarships or grants now face bigger tax bills, too, under the tax reform law that took full effect in 2018.
Previously, scholarships or grants for nontuition expenses like room and board were taxed at the same marginal rate that the students' parents paid. That meant lower- and middle-income students generally paid lower tax rates on the educational financial assistance.
But the TCJA now applies the higher trust and estates tax rate, which could top out at 37 percent, to the scholarship and grant money, too.
That's the same issue that's meant higher tax bills for children receiving death benefits for a parent who was killed while serving in the U.S. military.
Both inadvertently taxed groups learned of the higher taxes this filing season, the first one under the TCJA provisions.
College athletes also at tax risk: Ted Mitchell, president of the American Council on Education (ACE), sent a letter May 9 to members of the House Ways and Means and Senate Finance Committees, urging them to fix the added tax on student scholarships as quickly as possible.
The TCJA changes to the kiddie tax, wrote Mitchell, have "sharply increased the tax levied on the portion of scholarships set aside for expenses such as room and board that colleges and universities award to students from families of little or modest means. Now these students are being taxed at the same rates as wealthy individuals."
Mitchell offered members of the Congressional tax-writing an example:
Consider the impact on a full-time undergraduate student, claimed as a dependent by her parents, who have an income of $50,000 a year and jointly file as a married couple. In this example, the student receives a full scholarship for the total cost of the education at a private university, which includes tuition, room and board, books, and supplies.
Roughly $11,500 of the scholarship is subject to taxation, because it pays for room and board and similar expenses. If that money was taxed under the same 12 percent rate that applies to the student’s parents’ regular income, the amount owed now would be less than $1,400. But because it is taxed at the much higher trust and estates rates the amount owed is more than $2,600, an 85 percent increase.
Mitchell also pointed out that students attending college on athletic scholarships also are affected. Many of these young people, he wrote lawmakers, come from economically disadvantaged families who now are facing unexpected tax bills.
More possible kiddie tax victims? Overall, the increased tax on scholarship and grant aid could affect nearly 1.4 million students and their families, warned Mitchell.
And the number of unexpected kiddie tax victims might not end with Gold Star families or college scholarship recipients.
Survivor benefits given to children of first responders who died on the job also could be another potential tax trouble spot, according to Congressional sources who spoke to Politico's Morning Tax.
Corrections coming, but deliberately: Members of Congress tend to be loath to tax anyone.
When they end up accidentally raising the tax bills of sympathetic groups like families who lost loved ones during military service or students looking to improve their educations and lives, the political optics are particularly bad.
So it's no surprise that there's bipartisan agreement in Washington, D.C., to make TCJA kiddie tax changes that take care of those hit the law's unintended adverse tax consequences.
There's also agreement to make the changes as soon as possible.
Unfortunately, speed is not always a Congressional friend of lawmakers or affected taxpayers.
Politics at play, too: The Republicans' rush to get the their TCJA changes into law in the waning days of 2017 obviously produced the current tax problems for folks who definitely weren't targets.
Now some on lawmakers are leery of making changes, even ones that would fix the problem, too quickly.
Part of their caution is realistic haste-makes-waste trepidation. As the first responders survivors' situation indicates, some lawmakers want to make sure that any TCJA changes are thorough so they can done once and for all with this tax black eye.
Then there are the politics, specifically the polarized state of things on Capitol Hill.
Despite consensus that all the unwanted kiddie tax effects should be fixed ASAP, efforts to do so are posing and exposing additional rifts now that the House is back under Democratic control.
"We're working on fixing this, but this mess was created by Republicans," a House Democratic aide told Morning Tax.
You also might find these items of interest:
- Tax breaks can help pay many college costs
- Kiddie tax earnings (and more) inflation adjustments for 2019 tax year
- Student loan repayment help soon could be part of more companies' benefit packages
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