Lawmakers offer bill to undo tax hike on Gold Star families

A bipartisan group of House members on Thursday introduced legislation to fix an issue where the GOP tax law has been negatively affecting the children of deceased military members.

The legislation was introduced by Rep. Elaine Luria (D-Va.) and has a host of Republican and Democratic co-sponsors, including several members of the tax-writing House Ways and Means Committee.

The federal tax code contains a tax created in 1986, known as the “kiddie tax,” that is designed to prevent wealthy parents from sheltering their income from taxes by shifting it to their children.{mosads}

Republicans’ 2017 tax-cut law made a change to how children’s unearned income is taxed under the tax. Previously, the income was taxed at the rate of the children’s parents, but under the GOP tax law, the income is taxed at the same rate as trusts and estates.

The change unexpectedly resulted in the children of fallen troops paying more taxes on their survivor benefits. Task & Purpose, a news outlet focused on military and veterans affairs, reported last month that it is common for spouses of fallen troops to put Department of Defense survivor benefits in the names of their children in order to ensure that the families can receive survivor benefits from both the Pentagon and the Department of Veterans Affairs.

Under the new legislation, military survivor benefits would be treated as earned income, rather than as unearned income, so that they are not subject to the tax and instead are taxed at lower rates.

Luria said she offered the bill after hearing about the issue from a surviving spouse in her district.

“I knew I had to fight for her in Congress to fix a broken system that should be working for her and her family,” she said in a statement.

Ways and Means ranking member Kevin Brady (R-Texas), a key author of the 2017 tax law, also praised the bill.

“For years, tax experts asked Congress to simplify the way children are taxed on their unearned income, and we worked to provide that help in our new tax code,” he said in a statement. “Military survivor benefits are clearly different than a gift of stocks and bonds to a child, and they never should have been caught up in this decades-old anti-abuse tax in the first place.”

“When it was brought to our attention that simplification of the tax in 2017 was having unintended consequences for our Gold Star families, we worked quickly and on a bipartisan basis to find a solution that is fair and will also offer retroactive relief for affected families,” he added.

The issue affecting Gold Star families is one of several areas where there have been unintended consequences from the GOP tax law.  

Another issue that has received considerable attention is a drafting error that has resulted in retailers and restaurants having to write off the costs of their renovations over 39 years instead of one year as lawmakers intended. Retailers and restaurants this week stepped up their efforts to urge Congress to fix the issue.

Some of the fixes stakeholders are seeking to the tax law have bipartisan support. Still, it’s unclear when Congress will move legislation making corrections to the law. No Democrats voted for the 2017 tax law, and some key Democrats have said they don’t want Congress to fix drafting errors unless Congress also makes more substantive changes to the law.