Congress Fixes “Kiddie Tax” Mistake, Approves Other Higher Education Tax Provisions
December 20, 2019

Congress this week approved several tax provisions of importance to higher education, including a fix to the so-called “kiddie tax" mistake made in the drafting of the 2017 Tax Cuts and Jobs Act (TCJA) that has inadvertently caused harm to many low- and middle-income students who rely on scholarship aid to pay for their college education.

The provisions were part of the end-of-the-year spending package approved by the House Tuesday and by the Senate Thursday.

In addition to the kiddie tax fix, lawmakers approved a repeal of the so-called parking tax, a provision imposing a 21-percent tax on the value of transportation and parking benefits that tax-exempt nonprofits, including colleges and universities, provide to their employees.

Congress also approved the retroactive extension until Dec. 31, 2020, of the tuition deduction, which helps reduce the cost of college by allowing students or their parents to deduct up to $4,000 in eligible higher education expenses from their taxable income. 

And in a move that affects colleges and universities like all employers, Congress repealed the “Cadillac tax" on higher cost employer health insurance plans that was to go into effect in 2022.

The kiddie tax mistake was a particularly high-profile issue since it came to light that in the 2017 tax overhaul a mistake was made that resulted in hundreds of thousands of low- and middle-income students who rely on scholarship aid to pay for their college education to be taxed at the same rate as wealthy individuals for the portion of the aid devoted to non-tuition expenses. ACE sent several letters on the issue to the House and Senate, including this one and this one, calling on lawmakers to correct the error.

Since 1986, scholarships and/or 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 a student's parents, which particularly for low-income students is almost always very low.

But 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 and some student athletes.

ACE President Ted Mitchell, who wrote an op-ed in The Hill in May about the problem, released a statement applauding Congress for correcting this problem, which also affected some “Gold Star" families receiving survivor benefits.

“Fortunately, this fix will both restore lower tax rates to these individuals and provide an opportunity to obtain a refund for the extra taxes they were forced to pay in the meantime," Mitchell noted.