Senate passes bill to undo tax increase on Gold Star military families

Senate passes bill to undo tax increase on Gold Star military families
© Greg Nash

The Senate on Tuesday passed a bipartisan bill to fix an issue where the 2017 GOP tax law raised taxes on military survivor benefits received by children, a sign that addressing the matter has become a high priority in Congress.

Senators passed the measure by unanimous consent, and the House is expected to pass similar legislation this week.

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The GOP tax law made changes to the "kiddie tax" — a tax on children's unearned income that was designed to prevent wealthy people from avoiding taxes by shifting their income to their children. Before enactment, children's unearned income was taxed at their parents' rates, but under the 2017 law it is now taxed at the same rates as trusts.

The change had the effect of raising taxes on benefits received by the children of deceased military members, drawing concerns from lawmakers on both sides of the aisle.

Republicans have said that the issue concerning Gold Star families was unintentional, and that they made the changes to the kiddie tax in an effort to simplify how children's income is taxed. They said the provisions resemble a part of a 2014 tax-reform proposal from former Rep. Dave Camp (R-Mich.).

Democrats have brought up the tax increase as part of their criticisms of the GOP tax law, with the Democratic Senatorial Campaign Committee running digital ads on the issue. No Democrats voted for the measure, and they argue that the legislation was passed too hastily.

The bill the Senate passed on Tuesday would lower taxes for Gold Star families by treating the military survivor benefits as earned income for purposes of the kiddie tax, rather than as unearned income. The bill's provisions would take effect retroactively, applying to tax years starting in 2018.

Senators from both parties praised passage of the bill.

“This bipartisan legislation is one step closer to helping those who lost a father or mother serving in the military to protect our freedom,” said Sen. Bill CassidyBill CassidySunday shows preview: New COVID-19 variant emerges; supply chain issues and inflation persist Legislators look to expand health care access through telehealth, biosimilars Infrastructure deal is proof that Congress can still do good, bipartisan work MORE (R-La.), who introduced the measure.

Democratic Sens. Mark WarnerMark Robert WarnerFive Senate Democrats reportedly opposed to Biden banking nominee The Hill's Morning Report - Presented by ExxonMobil - House to vote on Biden social spending bill after McCarthy delay Overnight Defense & National Security — Presented by Boeing — US mulls Afghan evacuees' future MORE (Va.) and Tim KaineTimothy (Tim) Michael KaineDemocrats plow ahead as Manchin yo-yos Senate advances defense bill after delay Overnight Defense & National Security — Presented by Boeing — Senators to take up defense bill Wednesday MORE (Va.) said they are "glad" the Senate has moved to rectify the matter, and they hope the House "will take action swiftly to ensure that Gold Star families aren’t hit with a tax hike.”

In addition to military survivor benefits, the kiddie tax changes in the GOP tax law have drawn concerns for increasing taxes on other types of income, including college scholarships, payments from Indian tribal governments and survivor benefit payments to children of deceased first responders.

The House is planning to vote on a retirement savings bill this week. House Ways and Means Committee Chairman Richard NealRichard Edmund NealHouse passes giant social policy and climate measure The Hill's Morning Report - Presented by ExxonMobil - House to vote on Biden social spending bill after McCarthy delay Democrats press toward vote on massive Biden bill MORE (D-Mass.) has offered a manager's amendment that would have the rules for the kiddie tax revert back to their pre-GOP tax law rules.