Paul L. Caron
Dean


Monday, May 20, 2019

Children Of Deceased Soldiers, Low-Income College Students Are Taxed Like Trust-Fund Babies Under 2017 Tax Act

Wall Street Journal Tax Report, The Surprising Tax Bill for Sons and Daughters of Gold-Star Families:

The Kiddie Tax is a decades-old law meant to prevent the wealthy from shifting assets to children in order to take advantage of their lower income-tax rates.

But a revision to the tax in the big overhaul passed by Congress in 2017 is raising taxes on as many as 10,000 children of deceased service members who earn an average annual benefit of about $13,000, according to Department of Defense data provided by the Tragedy Assistance Program for Survivors, or TAPS. It’s a nonprofit group for families who have lost service members that’s working to change the law.

And the new rules reach well beyond military families. They can also raise taxes on children from lower-income families who receive income after a tragedy and pose a threat to millions of students receiving college financial aid.

Congress passed the Kiddie Tax in 1986. Until then a parent could, say, give a child appreciated stock and the child could sell it, pay tax at lower rates, and use the proceeds to pay for college tuition or a Corvette.

The 1986 provision levied the Kiddie Tax on a broad range of children’s “unearned” income above an exemption, which currently is $2,200. Above that amount, the children owed tax at the parents’ rate. The levy has never applied to a youngster’s earnings from being a camp counselor or designing websites.

Many features of the 1986 Kiddie Tax were complex, however. To simplify, the 2017 overhaul switched the Kiddie Tax rate from the parents’ rate to trust tax rates. These kick in at a very low level of taxable income: For 2019, the top rate of 37% takes effect at just $12,751.

Kiddie Tax

The revision reduces complexity, and often the switch in rates makes little difference to high-earning families. But it can be disastrous for lower-earning families.

New York Times, Low-Income College Students Are Being Taxed Like Trust-Fund Babies:

A little-noticed provision in President Trump’s sprawling new tax law is treating middle- and low-income college students as if they are trust-fund babies, taxing sizable financial aid packages at a rate first established 33 years ago to prevent wealthy parents from funneling money to their children to lower their tax burdens.

Higher-education leaders are calling on Congress to fix the provision, which drastically raised the tax rate on so-called unearned income for children with assets and young adults in school. Students with large financial aid packages are finding their nontuition assistance for items such as room and board taxed by as much as 37 percent, even if their family income tax rates are much lower.

The impact on full-time undergraduate and graduate students under the age of 24 went largely unnoticed until the waning weeks of tax season. But word is spreading. About 1.3 million undergraduate students and 15,000 graduate students have scholarships and grant aid that cover nontuition expenses. ...

In the past, a student from a household with a joint income of $50,000 who was awarded a scholarship that covered $11,500 in room and board would be taxed at their parents’ rate of 12 percent. Under the new law, that money would be taxed up to 35 percent.

https://taxprof.typepad.com/taxprof_blog/2019/05/children-of-deceased-soldiers-low-income-college-students-are-taxed-like-trust-fund-babies-under-201.html

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