Congress proposes fix to kiddie tax glitch facing Gold Star families

A bipartisan group of lawmakers has introduced legislation to offer tax relief to children who have lost a parent serving in the military after recent reports that “Gold Star” families are facing unexpectedly heavy tax bills because of the implications of a provision in the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act of 2017 aimed to simplify a number of provisions in the tax code. In this case, it was a special “kiddie tax” dating back to 1986 that was supposed to stop wealthy parents from sheltering income by shifting it to their children with lower tax rates. But the changes in the 2017 tax overhaul inadvertently caused higher taxes on military survivor benefits. If a child's interest, dividends and other unearned income total more than $2,100, it now may be subject to tax. Starting in 2018, the tax rates and brackets for the unearned income of children changed and are no longer affected by the tax situation of a child's parent or the unearned income of any siblings.

Many military families who have lost a parent are forced to rely on survivor benefits from both the Department of Defense and the Department of Veteran Affairs to scrape by after losing financial support from the military salary, but doing so can now lead to a large tax bill in the wake of the Tax Cuts and Jobs Act. CBS News reported in late April about the problem. “Because a surviving spouse can't receive both Veteran Affairs and Defense Department benefits simultaneously in full, Gold Star parents often sign the taxable DOD benefits over to their children. But the new tax law lumps Gold Star children into a bracket known as the ‘kiddie tax’ at 37 percent, much higher than their previous tax rate.”

The new bill, known as the Gold Star Family Tax Relief Act, would effectively remove these benefits from the special 1986 tax. It would treat military survivor benefits as earned income for purposes of the kiddie tax.

Rep. Kevin Brady, R-Texas, the top Republican on the House Ways and Means Committee, said the legislation would fix the problem for families facing the tax. “For years, tax experts asked Congress to simplify the way children are taxed on their unearned income, and we worked to provide that help in our new tax code,” he said in a statement last week. “Military survivor benefits are clearly different than a gift of stocks and bonds to a child, and they never should have been caught up in this decades-old anti-abuse tax in the first place. When it was brought to our attention that simplification of the tax in 2017 was having unintended consequences for our Gold Star families, we worked quickly and on a bipartisan basis to find a solution that is fair and will also offer retroactive relief for affected families.”

Andrew Harrer/Bloomberg