After ACE Advocacy Efforts, House Set to Vote on Fix to "Kiddie Tax" Mistake Impacting Low- and Middle-income Students
Published: May 22, 2019

The House is expected to vote on and approve a legislative fix later today or Thursday to an error in the 2017 Tax Cuts and Jobs Act (TCJA) affecting students who rely on scholarship aid to pay for their college education. The fix has been included in retirement legislation, the House SECURE Act (H.R. 1994).

ACE and others in the higher education community have been urging Congress to correct the mistake made in drafting the TCJA, which has inadvertently caused harm to many low- and middle-income students and others such as survivors of active-duty military personnel. 

Since 1986, scholarships and grants spent on non-tuition expenses such as room and board have been taxed. Prior to the TCJA, full-time students under age 24 had that scholarship money taxed under the so-called “kiddie tax” at the marginal rate of the students’ parents, which is almost always very low, particularly for low-income students. The TCJA changed the rate rules for the kiddie tax, applying the much higher rates used for trusts and estates. These changes to the kiddie tax 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.

Included in the SECURE Act are provisions that repeal the changes made to the kiddie tax in the TCJA, returning the expenses subject to the tax to their original lower rates. Individuals who paid the higher tax in returns filed for the 2018 tax year can file amended returns seeking refunds.

ACE President Ted Mitchell wrote a letter this week to Rep. Richard Neal (D-MA), chair of the House Ways and Means Committee, thanking the lawmaker for including the kiddie tax fix in the SECURE Act. Earlier this month, Mitchell sent a letter to the House and Senate tax writing committees that advocated for fixing the mistake. ACE was joined in this advocacy effort by colleagues from the National Association of Student Financial Aid Administrators and other higher education associations. 

In addition to working with lawmakers and their staff on Capitol Hill on this issue, Mitchell is quoted about the problem—which also affects others, such as Gold Star families receiving survivor benefits—in a recent story in The New York Times. In addition, Mitchell wrote an op-ed published in the May 20 edition of The Hill​ advocating for the fix.

The Times noted that in his letter to Congress, Mitchell stressed that the portion of college scholarships subject to the tax is usually awarded to students from families of little means. Among those students are college athletes awarded full scholarships, many of whom come from economically disadvantaged backgrounds. 

Meanwhile, the Senate passed a narrower kiddie tax fix Tuesday that only addresses the increased tax on survivors of active-duty military personnel, not students and other affected by the mistake. ACE will advocate for the broader fix included in the House SECURE Act to be adopted by the Senate. A free-standing Senate bill proposing a fix to the issue could be introduced as early as this week.​