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.
**********
(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.