The House is set to pass legislation on Thursday that would fix a quirk in the 2017 GOP tax overhaul that has generated big tax hikes on federal survivor benefits for certain Gold Star families. The bill would then go to President Trump’s desk.
“It is outrageous and unacceptable [that] children that have survived so much are now forced to pay thousands of additional dollars in taxes on their benefits,” said Speaker Nancy Pelosi. “Tomorrow, the House will pass a bipartisan, urgently needed fix.”
“I think if it does pass, it will be a good way to fix an unintended outcome that has hurt a lot of families,” said Yasin Wade, spokeswoman for the Tragedy Assistant Program for Survivors, a nonprofit advocacy group.
The tax hikes in question resulted from a provision in the tax overhaul interacting with a common workaround that Gold Star families use to maximize survivor benefits.
The workaround is that some families put Defense Department benefits in a child’s name so that they can claim death benefits from both the Defense Department and the Department of Veterans Affairs. Otherwise, they would be prevented from claiming both benefits by rules intended to prevent double-dipping — a situation referred to as the ‘military widow’s tax.’
The 2017 Tax Cuts and Jobs Act passed by Republicans and signed by Trump re-defined the benefits accruing to children as “unearned income,” subjecting them to higher estate tax rates.
The change resulted in some military families discovering that taxes on the Defense Department benefits they had put in a child’s name had soared by as much as five times or more this year, forcing many to scramble in order to cover the liability.
The Senate on Tuesday unanimously passed legislation, dubbed the Gold Star Families Tax Relief Act, to address the problem. A House version of that bill has been added as an amendment to bipartisan legislation on retirement and estate planning that House will take up on Thursday.
The Gold Star Families Tax Relief says that benefits put in the name of child of a deceased service member will be taxed as earned income, which would put them under the income tax bracket of the child’s surviving parent or guardian, restoring the pre-2017 standard.
The 2017 tax code change was intended to prevent the wealthy from avoiding estate taxes, according to individuals involved in the reform bill’s drafting, and nobody foresaw that it would ensnare military families too. The number may be in the thousands, given the number of families who receive the benefits. Those families are just a subsection of the ones hit by the widow’s tax, Wade noted. Those without children, among others, didn’t have that option in the first place.
Wade said the bill headed for passage Thursday still wouldn’t fix the underlying issue of the military widow’s tax but instead would only address the problems of the families who saw major tax hikes this year. “It’ll just be a fraction of the 62,000 families that are affected,” she said.
“I lost my husband seven years ago, and that was when I learned of the widow’s tax,” said Gabby Kubinyi, a New Jersey widow who now works for the Veterans of Foreign Wars. “It is unacceptable and wrong that we are asked to continue to sacrifice when that is what we have already done.”
Separate legislation by Reps. Joe Wilson, R-S.C., and John Yarmuth, D-Ky., has been introduced to end the prohibition on double-dipping. It currently has 152 bipartisan co-sponsors.
“I am confident that with the number of cosponsors we have we can get the necessary funding appropriated to cover this,” Wilson said at a Capitol Hill rally Wednesday.
