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ACE Urges Senate to Pass Fix to “Kiddie Tax” Mistake Impacting Low- and Middle-Income Students

June 05, 2019

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​ACE President Ted Mitchell sent a l​​​​etter Tuesday to Sens. Tim Scott (R-SC) and Maggie Hassan (D-NH), thanking the lawmakers for introducing legislation to fix a mistake in the 2017 tax law that affects students who rely on scholarship aid to pay for their college education.

The bipartisan bill corrects a mistake made in drafting the Tax Cuts and Jobs Act (TCJA), which has inadvertently caused harm to many low- and middle-income students and others such as “Gold Star” families, 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.

The Scott/Hassan bill—known as the Tax Relief for Student Success Act (S. 1667)—fixes this mistake, permitting individuals who paid the higher tax in returns filed for 2018, the first year the TCJA was in effect, to file amended returns seeking refunds.

“We strongly support this legislation, which would limit the tax liability of 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 individual income tax rate, rather than the trust/estate rate or even their parent’s rate,” Mitchell wrote in his letter

Meanwhile, the Senate is considering a similar kiddie tax fix already approved by the House as part a broader piece of legislation largely pertaining to retirement tax issues. The SECURE Act (H.R. 1994), passed 417-3 on May 23. There have been attempts to gain passage in the Senate by unanimous consent, meaning no formal vote tally is required. However, several senators objected because of other concerns with the SECURE Act, so that legislation’s path forward in the Senate remains uncertain.

ACE and others in the higher education community have been urging Congress to correct the kiddie tax mistake.

Mitchell wrote last month 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. He also sent a letter to the House and Senate tax writing committees earlier in May 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 by The New York Times in a recent story about the problem. In addition, he 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. 

As Mitchell stressed in his op-ed, “This is a mistake that lawmakers must fix—and do so now.”​

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