Taxes on some Gold Star family benefits skyrocket

With Congress back in session, Gold Star families are hoping lawmakers will move on legislation aimed at giving them tax relief.

Gold Star families refer to the immediate relatives of military members who died in the line of duty.

The Tax Cuts and Jobs Act made changes to what is known as the “kiddie tax,” which had unintended repercussions for taxes on distributions of military survivors’ benefits.

Benefits received by a surviving family member can decrease, under certain circumstances, due to the government’s rules regarding the interaction between two separate benefit plans– known as the Dependency and Indemnity Compensation (DIC) and the military Survivor Benefit Plan (SBP). In order to avoid an offset in benefits – known as the Widows Tax – surviving spouses can transfer some of the benefits to their children.

Under the previous law, those benefits were taxed at the same rate as what the surviving spouse was subject to. The new law taxes children’s unearned income at the same rate as trusts and estates.

The reform was intended to target wealthy children’s unearned income as a way to prevent rich people from avoiding taxes.

But it raised the average tax rate children pay on the benefits to 37 percent, from around 12 percent or 15 percent, according to data from the Tragedy Assistance Program For Survivors (TAPS).

"Some families are having to pay more than double or triple the amount on their children's taxable income," Candace Wheeler, a senior advisor on policy and legislation for TAPS told FOX Business. "Children of first responders are affected as well."

One mother told ABC News that taxes on her son’s benefits rose to $4,500, from around $1,000.

“I’ve not found anybody who either intentionally did it in the Tax Cuts and Jobs Act or is opposing this on deficit grounds or anything like that,” Retired Army Brig. Gen. Michael Meese told FOX Business. “They did not anticipate that this would be the implication.”

A House version of the Setting Every Community Up for Retirement Enhancement (SECURE) Act – a retirement reform bill – includes a provision that would treat certain military survivor benefits as earned income for the purposes of the kiddie tax.

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The bill was passed by the House of Representatives nearly unanimously in May. It has not made much progress in the Senate.

As previously reported by FOX Business, lawmakers are also asking Congress to repeal the Military Widows Tax.