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ACE, Others Urge Fix to Increased “Kiddie Tax” Impacting Low- and Middle-income Students

May 20, 2019

 

A legislative fix to the kiddie tax mistake affecting low-income students and others has been included in retirement legislation slated to come to the House floor for a vote later this week. The error made in drafting the 2017 Tax Cuts and Jobs Act (TCJA) has inadvertently caused harm to many low- and middle-income students who rely on scholarship aid to pay for their college education, as we wrote on Friday (see below).

The fix to the kiddie tax incorporated into the House SECURE Act (H.R. 1994) will limit the tax liability of these students by treating the portion of scholarship aid devoted to non-tuition expenses as a form of earned income which will be taxed at the student’s income tax rate, which will be very low since these students will have little earned income. In addition, the provision is retroactive to Dec. 31, 2017, which will mean that the fix applies to 2018 taxable year. This will bring much needed relief to those who were harmed by the mistaken changes to the kiddie tax in the TCJA.

ACE President Ted Mitchell wrote an op-ed published today​ in The Hill about the importance of fixing the problem.

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(May 17, 2019)ACE and others in the higher education community are urging Congress to correct a 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. 

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 the 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.

ACE President Ted Mitchell wrote a letter to the House and Senate tax writing committees that has more detailed information, and ACE has been 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, advocating that they pass a measure correcting this mistake, Mitchell is quoted about the issue (which also affects others, such as Gold Star families receiving survivor benefits) in this story in The New York Times

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. “Now, these students are being taxed at the same rates as wealthy individuals,” the letter stated.

Indications are that tax writers in Congress are working to rectify this unfortunate situation, and there may be news soon about a proposed legislative fix.​

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