Advocates have said the so-called military “kiddie tax” cost some families as much as $10,000 last spring, and could have meant even bigger bills next spring for thousands of families. Now, under the fix included in the $1.4 trillion budget deal headed to the White House, that burden will be erased and families will be able to apply for refunds for last year’s taxes.
“Our service members protect our nation, but they also protect their families,” said Kelly Hruska, government relations director at the National Military Families Association. “The repeal of the kiddie tax ensures the service and sacrifice of their parents is recognized and honored.”
Both the House and the Senate passed bills to fix the issue, but haven't reached a compromise solution yet.
The problem stemmed from the tax code overhaul passed in 2017, which mandated that certain minors with unearned income be taxed at a rate as high as 37 percent. The idea behind that change was to prevent families from using underage children to shield income for tax purposes.
But the move was particularly traumatic to military families who lost a loved one on duty and saw their Defense Department death benefits suddenly taxed at a much higher rate. While those benefits typically go to a spouse, in some cases families have transferred them to children to counter a separate offset problem known as the military “widow’s tax.”
Lawmakers corrected that offset in the annual defense authorization bill passed by Congress earlier this week. But that move didn’t provide any relief for families hit by the “kiddie tax.”
The provision is part of the massive defense authorization bill compromise unveiled Monday night.
In a statement, Rep. Elaine Luria, D-Va. and the sponsor of the tax fix language, called the measure an urgent priority to help “America’s most heroic families” recover from a congressional mistake.
The fix itself had been non-controversial, with members from both parties expressing support for the idea over the last few months. But the legislation was stalled amid other budget fights until the final days of this year’s session.
President Donald Trump is expected to sign the measure into law before midnight on Friday. If he opts not to finalize the budget bills, it would trigger a partial government shutdown.