Dallas Morning News: A tax glitch dinged this Gold Star family in Wylie, along with many others. Congress is working on a fix.

June 3, 2019

By Tom Benning

WASHINGTON — Becky Welch, a Wylie mother of two, walked into her accountant’s office in early April only to be greeted by the startling news that she owed nearly $1,800 more in federal taxes this year than usual.

The reason why stung more than any dollar amount could.

A component of the tax overhaul Congress passed in 2017, as it turned out, had produced the unintended effect of hiking taxes on survivor benefits she and her two boys have received ever since her husband, Army 1st Lt. Rob Welch, was killed in combat in Afghanistan in 2011.

Becky Welch learned of the tax increase just days after she had hosted an annual charity run to commemorate her husband’s death.

“It felt like a real slap in the face,” said Welch, 34, recalling how her accountant consoled her over the unexpected hit.

Relief may be coming for the Welches and other Gold Star families, which are those who’ve seen loved ones die while serving in the military. The same could be true for others, such as relatives of first responders killed in the line of duty, dinged by what’s been dubbed the “kiddie tax.”

That’s because Congress has undertaken the rare course of legislating quickly and in a bipartisan manner.

The GOP-run Senate has passed a retroactive fix for Gold Star families. The Democratic-run House, in turn, has approved a broader correction via a bill focused on retirement legislation. The two chambers just need to settle on one option or the other to rectify the matter.

Lawmakers in both parties are confident a deal is forthcoming, even amid some continued partisan wrangling.

“This tax penalty for Gold Star families is something that there should be wide bipartisan agreement that we should fix and fix right away,” said Houston Rep. Lizzie Fletcher, a Democrat who co-sponsored a House bill to resolve the problem for Gold Star families.

The “kiddie tax” highlights the wide reach of the $1.5 trillion tax overhaul that Congress passed in late 2017 with only Republican support.

The revamp cut taxes for most individuals and businesses in Texas and beyond, marking the signature legislative achievement of President Donald Trump’s time in Washington. But it’s also produced some curious results, and not always by design.

An effective penalty on Gold Star families is among the unintended consequences.

Tax writers included in the overhaul a tweak aimed at preventing wealthy parents from essentially hiding money in their children’s name. In doing so, they inadvertently hit at the unusual way military survivors’ benefits are doled out.

Surviving spouses are eligible for an untaxed benefit through the Veterans Affairs Department and then also a taxable benefit through the Defense Department.

Federal law requires a dollar-for-dollar offset if a surviving spouse receives both benefits — a setup dubbed by some as the “widows tax.” To collect the full amount available, some surviving spouses chose to direct the Defense Department benefit to their children.

There has long been a push to eliminate the need for a work-around in the first place. And advocates are hopeful there might be a breakthrough in this Congress, given that such legislation has overwhelming bipartisan support, including from a majority of the Texas delegation.

But the 2017 tax overhaul presented a more immediate problem.

Survivor benefits designated toward children had previously been taxed at an average rate of 12% to 15%, according to Tragedy Assistance Program for Survivors, a group that’s been tracking the issue. Under the changes in the new tax code, that rate increased to as high as 37%.

For Welch, the taxes on the benefit for her family jumped to $2,200 this year from $400 in years past — an unexpected increase that eats into vital income.

“I tell the boys that this is money their dad would be bringing in if he were still alive,” she said, explaining that every dollar goes toward food, clothing and other care for her children, ages 11 and 9. “We’ve been blessed to be able to survive on this.”

Welch, whose story was first reported by KXAS-TV (Channel 5), soon learned that many other Gold Star families were in a similar situation. She then decided to attend a community coffee meeting held by Rep. Van Taylor, R- Plano, to press for a solution.

Taylor, a Marine veteran, listened to Welch’s predicament and asked what he could do to help, Welch recalled.

The congressman signed on as a co-sponsor to the same legislative correction to the “kiddie tax” that was ultimately co-sponsored by Fletcher and several other Texans, including Rep. Kenny Marchant, R-Coppell; Rep. Bill Flores, R-Bryan; and Rep. Colin Allred, D-Dallas.

“While nothing can make up for the incredible loss these heroic families have suffered, we can show a small token of our appreciation by ensuring Gold Star Families receive the benefits promised by our nation,” Taylor said in a news release.

The fix, which works by simply treating the benefit as earned income, appears all but certain to pass, providing Welch and others retroactive relief. But some politics have still come into play.

The Democratic Senatorial Campaign Committee, for instance, sought to ding Texas Sen. John Cornyn — a Republican up for re-election next year — for having “helped pass a reckless law forcing Gold Star families to pay higher taxes on their survivor benefits.”

Cornyn campaign manager John Jackson said, “D.C. Democrats using Gold Star families for political gain is as unsurprising as it is disgusting.” Cornyn, meanwhile, co-sponsored the Senate version of the fix, citing the need to “act swiftly” to correct an “unacceptable” error.

The House’s decision to fold the “kiddie tax” fix into broader retirement legislation added another complication.

Some Republicans were miffed that Democrats excluded an unrelated provision that would’ve expanded 529 savings accounts to cover things like homeschooling expenses. That’s partly why Rep. Chip Roy, R-Austin, was one of three House lawmakers to vote against the bill — a decision that drew outrage from the Democratic Congressional Campaign Committee.

Then in the Senate, Texas Sen. Ted Cruz helped hold up speedy passage of the House bill over those same 529 concerns, according to CNN.

Cruz, a Republican, told CNN that the “kiddie tax” fix is the “right thing to do” and pointed out that he also co-sponsored the narrow Senate version of the correction. But he told CNN that lawmakers should still “act for the benefit of school kids all across the country.”

A Cruz spokesman reiterated the senator’s co-sponsorship of the Senate bill, adding that Cruz “strongly supports its passage.” But he said Cruz also wants approval of the 529 expansion to cover tutoring services, standardized testing fees and other expenses.

“The Senate should act for the benefit of school kids all across the country and help Gold Star families at the same time,” the Cruz spokesman said.

Link: https://www.dallasnews.com/news/politics/2019/06/03/a-tax-glitch-dinged-this-gold-star-family-in-wylie-along-with-many-others-congress-is-working-on-a-fix/