{ "id": "IN11112", "type": "CRS Insight", "typeId": "INSIGHTS", "number": "IN11112", "active": true, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 614195, "date": "2020-01-15", "retrieved": "2020-01-22T13:58:33.879730", "title": "The Kiddie Tax and Military Survivors\u2019 Benefits", "summary": "Some military families discovered that they owed higher taxes for 2018 and 2019 on distributions from their military survivors\u2019 benefits than they had in previous years. This change in tax treatment was related to temporary changes to the \u201ckiddie tax\u201d in the 2017 tax revision (P.L. 115-97). However, Congress enacted language in the Further Consolidated Appropriations Act, 2020 (P.L. 116-94) that repealed those temporary changes to the kiddie tax beginning in 2020. In addition, P.L. 116-94 enables taxpayers to retroactively elect to be taxed as if the kiddie tax changes in P.L. 115-97 did not apply in 2018 and 2019 (by filing an amended tax return). \nMilitary Survivor Benefits to Children\nRetired servicemembers may elect to provide their spouses and/or children with up to 55% of their pension following the member\u2019s death as part of a program called the Survivor Benefit Plan (SBP) (10 U.S.C. 1448). In 2001, as part of P.L. 107-107, Congress expanded eligibility for this benefit to dependents of servicemembers who die while in active service. The Department of Defense (DOD) distributes SBP payments as a taxable monthly annuity for the lifetime of a surviving spouse, former spouse, and/or surviving children up to age 18 or 22. Due to a dollar-for-dollar offset with another federal benefit for some surviving spouses called Dependency and Indemnity Compensation (DIC), it is often more financially beneficial for families with a member who dies on active duty to elect children as the SBP beneficiaries to avoid this offset. As of September 30, 2018, DOD reported 2,736 dependent children receiving SBP annuities as the sole beneficiary due to a parent\u2019s death in retirement and an additional 7,179 receiving an annuity due to a parent\u2019s death during active service. The amount of the SBP annuity varies and depends on the servicemember\u2019s retired pay base at the time of death. On average, a survivor receives about $1,050 per month from SBP alone (not including other benefits, such as Social Security). \nIn Section 622 of the National Defense Authorization Act for FY2020 (NDAA; P.L. 116-92), Congress repealed the SBP-DIC offset with a three-year phaseout period. This law also repealed eligibility for spouses of members who die on active duty to transfer the SBP benefit to a child or children. Spouses who elected to transfer the SBP benefit to their children under prior law will have the ability to have this benefit transferred back to them if they continue to meet other eligibility criteria. The Congressional Budget Office (CBO) estimated these changes would increase direct spending by $4.68 billion over 10 years.\nWhat Is the Kiddie Tax?\nThe kiddie tax was first enacted as part of the Tax Reform Act of 1986. Its purpose was to prevent wealthy parents from reducing their own tax liability by creating investment accounts and trusts in the names of their children, who would typically be subject to lower tax rates. \nGenerally, a child must file a separate return to report his or her income (like any other taxpayer). Generally, a child\u2019s unearned income above $2,100 for 2018 ($2,200 for 2019) may be subject to the kiddie tax. The kiddie tax applies regardless of whether the child may be claimed as a dependent on his or her parents\u2019 return. \nThe parents may elect to include on their return the unearned income of a child to avoid the kiddie tax. If a child\u2019s gross income is only from interest and dividends and the amount of the gross income is greater than $1,050 in 2018 ($1,100 for 2019) and less than $10,500 in 2018 ($11,000 for 2019), the parents may elect to report the child\u2019s gross income on the parents\u2019 return, and the child is treated as having no gross income. The election is made by filing Form 8814. A tax of 10% is imposed on up to $1,050 in 2018 ($1,100 for 2019) of the child\u2019s gross income included on the parents\u2019 return.\nComputation of the Kiddie Tax Before and After the 2017 Tax Revision\nBefore enactment of the 2017 tax revision (P.L. 115-97), the child\u2019s tax liability under the kiddie tax was equal to the greater of (1) the tax on all of the child\u2019s income without regard to the kiddie tax or (2) the sum of the tax on the child\u2019s total income reduced by net unearned income plus the child\u2019s share of the \u201callocable parent tax.\u201d The allocable parent tax equaled the hypothetical increase in tax to the parent that resulted from adding the child\u2019s net unearned income to the parent\u2019s taxable income. The effect was that the child\u2019s unearned income was taxed at the higher of the child\u2019s or parent\u2019s marginal tax rate. \nThe 2017 tax revision changed the calculation of the kiddie tax by taxing a child\u2019s unearned income according to the tax rates that apply to estates and trusts rather than through the allocable parent tax method. The graduated rates for income from estates and trusts applied at relatively low income levels, though, compared to ordinary income tax rates. These changes, which increased the rate of tax on a child\u2019s unearned income, were in effect under the law for the 2018 and 2019 tax years (and were supposed to be temporarily in effect through 2025). Hence, as a result of this change, some military families owed higher taxes on their military survivors\u2019 benefits than they had in previous years.\nLegislative Activity\nOn December 20, 2019, Congress enacted the Further Consolidated Appropriations Act, 2020 (P.L. 116-94). Division O, Section 501 of that law repealed the 2017 tax revision\u2019s changes to the kiddie tax beginning with the 2020 tax year. P.L. 116-94 also allows taxpayers to file an amended tax return for the 2018 or 2019 tax years and retroactively elect to be taxed as if the 2017 tax revision\u2019s kiddie tax changes did not apply. The Joint Committee on Taxation (JCT) estimated that the provision would reduce federal revenue by $470 million over 10 years.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11112", "sha1": "f391add012e6044a603e672570f199571f34f362", "filename": "files/20200115_IN11112_f391add012e6044a603e672570f199571f34f362.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11112", "sha1": "29a5d0e1dd36114fa68427996176fae74ec96783", "filename": "files/20200115_IN11112_29a5d0e1dd36114fa68427996176fae74ec96783.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4799, "name": "Individual Tax" }, { "source": "IBCList", "id": 4872, "name": "Military Personnel, Compensation, & Health Care" }, { "source": "IBCList", "id": 4945, "name": "Tax Reform" } ] }, { "source": "EveryCRSReport.com", "id": 598752, "date": "2019-05-24", "retrieved": "2019-09-16T22:31:55.165080", "title": "The Kiddie Tax and Military Survivors\u2019 Benefits", "summary": "Some military families have discovered that they owe higher taxes for 2018 on distributions from their military survivors\u2019 benefits than they had in previous years. This change in tax treatment is related to temporary changes to the \u201ckiddie tax\u201d in the 2017 tax revision (P.L. 115-97).\nMilitary Survivor Benefits to Children\nRetired servicemembers may elect to provide their spouses and/or children with up to 55% of their pension following the member\u2019s death as part of a program called the Survivor Benefit Plan (SBP) (10 U.S.C. 1448). In 2001 (P.L. 107-107), Congress expanded eligibility for this benefit to dependents of servicemembers who die while in active service. The Department of Defense (DOD) distributes SBP payments as a taxable monthly annuity for the lifetime of a surviving spouse and up to age 18 or 22 for most surviving children. Due to a dollar-for-dollar offset with another federal benefit for some surviving spouses called Dependency and Indemnity Compensation (DIC), it is often more financially beneficial for the family to elect children as the SBP beneficiaries to avoid this offset. As with SBP, survivors of servicemembers who die on active duty are also automatically eligible for DIC. As of September 30, 2017, DOD reported 2,699 dependent children receiving SBP annuities due to a parent\u2019s death in retirement and an additional 6,916 receiving an annuity due to a parent\u2019s death during active service. The amount of the SBP annuity varies and depends on the servicemember\u2019s retired pay base at the time of death. On average, a survivor receives about $1,050 per month from SBP alone (not including other benefits, such as Social Security).\nWhat Is the Kiddie Tax?\nThe kiddie tax was first enacted as part of the Tax Reform Act of 1986. Its purpose was to prevent wealthy parents from reducing their own tax liability by creating investment accounts and trusts in the names of their children, who were typically subject to lower tax rates. \nGenerally, a child must file a separate return to report his or her income (like any other taxpayer). Children with unearned income above $2,100 for 2018 ($2,200 for 2019) may be subject to the kiddie tax. The kiddie tax applies regardless of whether the child may be claimed as a dependent on his or her parents\u2019 return. \nA child is subject to kiddie tax on all net unearned income. This is the excess of their adjusted gross income for the tax year that is not earned income over the sum of (1) the amount of the child\u2019s limited standard deduction ($1,050 for 2018 and $1,100 for 2019) and (2) the greater of the amount of the child\u2019s limited standard deduction or itemized deductions attributable to unearned income for the year. \nThe parents may elect to include on their return the unearned income of a child to avoid the kiddie tax. If a child\u2019s gross income is only from interest and dividends and the amount of the gross income is greater than $1,050 in 2018 ($1,100 for 2019) and less than $10,500 in 2018 ($11,000 for 2019), the parents may elect to report the child\u2019s gross income on the parents\u2019 return, and the child is treated as having no gross income. The election is made by filing Form 8814. A tax of 10% is imposed on up to $1,050 in 2018 ($1,100 for 2019) of the child\u2019s gross income included on the parents\u2019 return.\nComputation of the Kiddie Tax Before and After the 2017 Tax Revision\nBefore 2018 and after 2025, the child\u2019s tax liability under the kiddie tax is equal to the greater of (1) the tax on all of the child\u2019s income without regard to the kiddie tax or (2) the sum of the tax on the child\u2019s total income reduced by net unearned income plus the child\u2019s share of the \u201callocable parent tax.\u201d The allocable parent tax equals the hypothetical increase in tax to the parent that results from adding the child\u2019s net unearned income to the parent\u2019s taxable income. The effect is that the child\u2019s unearned income is taxed at the higher of the child\u2019s or parent\u2019s marginal tax rate. \nThe 2017 tax revision (P.L. 115-97) changed the calculation of the kiddie tax by taxing a child\u2019s unearned income according to the tax rates that apply to estates and trusts rather than through the allocable parent tax method. The graduated rates for income from estates and trusts apply at relatively low levels, though, compared to ordinary income tax rates.\nLegislative Options\nOn May 21, the Senate passed the Gold Star Family Tax Relief Act (S. 1370; H.R. 2481), which would permanently define SBP distributions to a child as earned income in tax years 2018 and beyond, therefore exempting them from the kiddie tax. (Affected families that already submitted their 2018 income tax filings would have to file an amended return to benefit from the changes.) This option would likely be more generous than taxing the SBP benefits on a parent\u2019s return, because children often face a lower marginal tax rate than their parents. \nOn May 23, the House passed the Setting Every Community Up For Retirement Enhancement (SECURE) Act of 2019 (H.R. 1994), which would repeal the 2017 tax revision\u2019s temporary changes to the kiddie tax, altogether. The Joint Committee on Taxation estimated that the SECURE Act\u2019s provision would cost $512 million over 10 years. \nCongress could also tax SBP distributions on a parent\u2019s income tax return as ordinary income without regard to the limits on the election under current law, described above, or enact legislation to exclude SBP benefits from gross income (either temporarily or permanently). \nAs another option, Congress could authorize a temporary SBP open season for families negatively affected by the tax law to change the beneficiary from the child or children to the widowed spouse. The attractiveness to families of this option would depend on factors such as the age of the children, the total household income, and interactions with other federal benefits.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": false, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11112", "sha1": "4744588b69d1d06e9c38d5823d1af186636cf45e", "filename": "files/20190524_IN11112_4744588b69d1d06e9c38d5823d1af186636cf45e.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11112", "sha1": "df86cc9f70777851634c3a03e503553528f7314d", "filename": "files/20190524_IN11112_df86cc9f70777851634c3a03e503553528f7314d.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4799, "name": "Individual Tax" }, { "source": "IBCList", "id": 4872, "name": "Military Personnel, Compensation, & Health Care" }, { "source": "IBCList", "id": 4945, "name": "Tax Reform" } ] }, { "source": "EveryCRSReport.com", "id": 598631, "date": "2019-05-22", "retrieved": "2019-05-22T22:00:36.756466", "title": "The Kiddie Tax and Military Survivors\u2019 Benefits", "summary": "Some military families have discovered that they owe higher taxes for 2018 on distributions from their military survivors\u2019 benefits than they had in previous years. This change in tax treatment is related to temporary changes to the \u201ckiddie tax\u201d in the 2017 tax revision (P.L. 115-97).\nMilitary Survivor Benefits to Children\nRetired servicemembers may elect to provide their spouses and/or children with up to 55% of their pension following the member\u2019s death as part of a program called the Survivor Benefit Plan (SBP) (10 U.S.C. 1448). In 2001 (P.L. 107-107), Congress expanded eligibility for this benefit to dependents of servicemembers who die while in active service. The Department of Defense (DOD) distributes SBP payments as a taxable monthly annuity for the lifetime of a surviving spouse and up to age 18 or 22 for most surviving children. Due to a dollar-for-dollar offset with another federal benefit for some surviving spouses called Dependency and Indemnity Compensation (DIC), it is often more financially beneficial for the family to elect children as the SBP beneficiaries to avoid this offset. As with SBP, survivors of servicemembers who die on active duty are also automatically eligible for DIC. As of September 30, 2017, DOD reported 2,699 dependent children receiving SBP annuities due to a parent\u2019s death in retirement and an additional 6,916 receiving an annuity due to a parent\u2019s death during active service. The amount of the SBP annuity varies and depends on the servicemember\u2019s retired pay base at the time of death. On average, a survivor receives about $1,050 per month from SBP alone (not including other benefits, such as Social Security).\nWhat Is the Kiddie Tax?\nThe kiddie tax was first enacted as part of the Tax Reform Act of 1986. Its purpose was to prevent wealthy parents from reducing their own tax liability by creating investment accounts and trusts in the names of their children, who were typically subject to lower tax rates. \nGenerally, a child must file a separate return to report his or her income (like any other taxpayer). Children with unearned income above $2,100 for 2018 ($2,200 for 2019) may be subject to the kiddie tax. The kiddie tax applies regardless of whether the child may be claimed as a dependent on his or her parents\u2019 return. \nA child is subject to kiddie tax on all net unearned income. This is the excess of their adjusted gross income for the tax year that is not earned income over the sum of (1) the amount of the child\u2019s limited standard deduction ($1,050 for 2018 and $1,100 for 2019) and (2) the greater of the amount of the child\u2019s limited standard deduction or itemized deductions attributable to unearned income for the year. \nThe parents may elect to include on their return the unearned income of a child to avoid the kiddie tax. If a child\u2019s gross income is only from interest and dividends and the amount of the gross income is greater than $1,050 in 2018 ($1,100 for 2019) and less than $10,500 in 2018 ($11,000 for 2019), the parents may elect to report the child\u2019s gross income on the parents\u2019 return, and the child is treated as having no gross income. The election is made by filing Form 8814. A tax of 10% is imposed on up to $1,050 in 2018 ($1,100 for 2019) of the child\u2019s gross income included on the parents\u2019 return.\nComputation of the Kiddie Tax Before and After the 2017 Tax Revision\nBefore 2018 and after 2025, the child\u2019s tax liability under the kiddie tax is equal to the greater of (1) the tax on all of the child\u2019s income without regard to the kiddie tax or (2) the sum of the tax on the child\u2019s total income reduced by net unearned income plus the child\u2019s share of the \u201callocable parent tax.\u201d The allocable parent tax equals the hypothetical increase in tax to the parent that results from adding the child\u2019s net unearned income to the parent\u2019s taxable income. The effect is that the child\u2019s unearned income is taxed at the higher of the child\u2019s or parent\u2019s marginal tax rate. \nThe 2017 tax revision (P.L. 115-97) changed the calculation of the kiddie tax by taxing a child\u2019s unearned income according to the tax rates that apply to estates and trusts rather than through the allocable parent tax method. The graduated rates for income from estates and trusts apply at relatively low levels, though, compared to ordinary income tax rates.\nLegislative Options\nCongress could consider tax policy options to prevent a child\u2019s SBP payments from being taxed at a rate higher than either the parent\u2019s or child\u2019s marginal income tax rate. A special rule could be enacted to the temporary kiddie tax provisions. On May 21, the Senate passed the Gold Star Family Tax Relief Act (S. 1370; H.R. 2481), which would permanently define SBP distributions to a child as earned income in tax years 2018 and beyond, therefore exempting them from the kiddie tax. (Affected families that already submitted their 2018 income tax filings would have to file an amended return to benefit from the changes.) This option would likely be more generous than taxing the SBP benefits on a parent\u2019s return, because children often face a lower marginal tax rate than their parents. Congress could also tax SBP distributions on a parent\u2019s income tax return as ordinary income without regard to the limits on the election under current law, described above, or enact legislation to exclude SBP benefits from gross income (either temporarily or permanently). \nAs another option, Congress could authorize a temporary SBP open season for families negatively affected by the tax law to change the beneficiary from the child or children to the widowed spouse. The attractiveness to families of this option would depend on factors such as the age of the children, the total household income, and interactions with other federal benefits.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11112", "sha1": "a0868e4321ef2847e0dd7dac1582c35fe28ed28b", "filename": "files/20190522_IN11112_a0868e4321ef2847e0dd7dac1582c35fe28ed28b.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11112", "sha1": "f8b9dc563631d6b9bbe7fd0692957c52f7fceda6", "filename": "files/20190522_IN11112_f8b9dc563631d6b9bbe7fd0692957c52f7fceda6.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4799, "name": "Individual Tax" }, { "source": "IBCList", "id": 4872, "name": "Military Personnel, Compensation, & Health Care" }, { "source": "IBCList", "id": 4945, "name": "Tax Reform" } ] }, { "source": "EveryCRSReport.com", "id": 597825, "date": "2019-05-03", "retrieved": "2019-05-03T22:16:16.707374", "title": "The Kiddie Tax and Military Survivors\u2019 Benefits", "summary": "Some military families have discovered that they owe higher taxes for 2018 on distributions from their military survivors\u2019 benefits than they had in previous years. This change in tax treatment is related to temporary changes to the \u201ckiddie tax\u201d in the 2017 tax revision (P.L. 115-97).\nMilitary Survivor Benefits to Children\nRetired servicemembers may elect to provide their spouses and/or children with up to 55% of their pension following the member\u2019s death as part of a program called the Survivor Benefit Plan (SBP) (10 U.S.C. 1448). In 2001 (P.L. 107-107), Congress expanded eligibility for this benefit to dependents of servicemembers who die while in active service. The Department of Defense (DOD) distributes SBP payments as a taxable monthly annuity for the lifetime of a surviving spouse and up to age 18 or 22 for most surviving children. Due to a dollar-for-dollar offset with another federal benefit for some surviving spouses called Dependency and Indemnity Compensation (DIC), it is often more financially beneficial for the family to elect children as the SBP beneficiaries to avoid this offset. As with SBP, survivors of servicemembers who die on active duty are also automatically eligible for DIC. As of September 30, 2017, DOD reported 2,699 dependent children receiving SBP annuities due to a parent\u2019s death in retirement and an additional 6,916 receiving an annuity due to a parent\u2019s death during active service. The amount of the SBP annuity varies and depends on the servicemember\u2019s retired pay base at the time of death. On average, a survivor receives about $1,050 per month from SBP alone (not including other benefits, such as Social Security).\nWhat Is the Kiddie Tax?\nThe kiddie tax was first enacted as part of the Tax Reform Act of 1986. Its purpose was to prevent wealthy parents from reducing their own tax liability by creating investment accounts and trusts in the names of their children, who were typically subject to lower tax rates. \nGenerally, a child must file a separate return to report his or her income (like any other taxpayer). Children with unearned income above $2,100 for 2018 ($2,200 for 2019) may be subject to the kiddie tax. The kiddie tax applies regardless of whether the child may be claimed as a dependent on his or her parents\u2019 return. \nA child is subject to kiddie tax on all net unearned income. This is the excess of their adjusted gross income for the tax year that is not earned income over the sum of (1) the amount of the child\u2019s limited standard deduction ($1,050 for 2018 and $1,100 for 2019) and (2) the greater of the amount of the child\u2019s limited standard deduction or itemized deductions attributable to unearned income for the year. \nThe parents may elect to include on their return the unearned income of a child to avoid the kiddie tax. If a child\u2019s gross income is only from interest and dividends and the amount of the gross income is greater than $1,050 in 2018 ($1,100 for 2019) and less than $10,500 in 2018 ($11,000 for 2019), the parents may elect to report the child\u2019s gross income on the parents\u2019 return, and the child is treated as having no gross income. The election is made by filing Form 8814. A tax of 10% is imposed on up to $1,050 in 2018 ($1,100 for 2019) of the child\u2019s gross income included on the parents\u2019 return.\nComputation of the Kiddie Tax Before and After the 2017 Tax Revision\nBefore 2018 and after 2025, the child\u2019s tax liability under the kiddie tax is equal to the greater of (1) the tax on all of the child\u2019s income without regard to the kiddie tax or (2) the sum of the tax on the child\u2019s total income reduced by net unearned income plus the child\u2019s share of the \u201callocable parent tax.\u201d The allocable parent tax equals the hypothetical increase in tax to the parent that results from adding the child\u2019s net unearned income to the parent\u2019s taxable income. The effect is that the child\u2019s unearned income is taxed at the higher of the child\u2019s or parent\u2019s marginal tax rate. \nThe 2017 tax revision (P.L. 115-97) changed the calculation of the kiddie tax by taxing a child\u2019s unearned income according to the tax rates that apply to estates and trusts rather than through the allocable parent tax method. The graduated rates for income from estates and trusts apply at relatively low levels, though, compared to ordinary income tax rates.\nLegislative Options\nCongress could consider tax policy options to prevent a child\u2019s SBP payments from being taxed at a rate higher than either the parent\u2019s or child\u2019s marginal income tax rate. A special rule could be enacted to the temporary kiddie tax provisions. For example, SBP distributions could be taxed under a parent\u2019s income tax return as ordinary income without regard to the limits on the election under current law, described above. On May 2, a group of lawmakers introduced legislation that would permanently define SBP distributions to a child as earned income, therefore exempting them from the kiddie tax. This option would likely be more generous than taxing the SBP benefits on a parent\u2019s return, because children often face a lower marginal tax rate than their parents. Congress could also enact legislation to exclude SBP benefits from gross income either temporarily or permanently. \nAs another option, Congress could authorize a temporary SBP open season for families negatively affected by the tax law to change the beneficiary from the child or children to the widowed spouse. The attractiveness to families of this option would depend on factors such as the age of the children, the total household income, and interactions with other federal benefits.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11112", "sha1": "a1038a196e3cbbcf785d51f3276809dd03e92a94", "filename": "files/20190503_IN11112_a1038a196e3cbbcf785d51f3276809dd03e92a94.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11112", "sha1": "6e149c1133f438bf91e84ac464e9b8f4402e7969", "filename": "files/20190503_IN11112_6e149c1133f438bf91e84ac464e9b8f4402e7969.pdf", "images": {} } ], "topics": [] } ], "topics": [ "Appropriations", "CRS Insights", "National Defense" ] }