May 28, 2019
House Passes Bill to Address Tax Treatment of Scholarships and Grants
The House recently passed retirement legislation, H.R. 1994, containing a provision that would repeal the tax rates assigned to student scholarship and grant amounts used for room and board that were part of the 2017 tax reform overhaul.
As a result of the 2017 tax reform law, tax rates were changed in an effort to simplify the tax code by incorporating more universal rates across the board, rather than different rates for different benefits.
Prior to the 2017 Tax Cuts and Jobs Act (TCJA), rates for scholarship and grant amounts were taxed at the parents’ rate. TCJA, however, changed the code so these resources would be taxed at the rate of estates and trusts. The result was that students and families with substantial room and board grant awards were seeing surprisingly high tax bills. This was especially true for low income students, athletes, and travel abroad students who were hit particularly hard.
The rate change also affected other groups of taxpayers, including: children of service members killed in the line of duty (Gold Star families) and children of first responders.
H.R. 1994 repeals the tax rate change for all categories of individuals affected by the TCJA.
The Senate, however, has already passed retirement legislation that only repeals the benefit for Gold Star families. The Senate is indicating it could adopt the House language separately under unanimous consent, but Senators are not happy that the House bill repeals the ability for IRC Sec. 529 plans to be used for K-12 and homeschooling expenses. One attempt at unanimous consent was blocked due to the elimination of the Sec. 529 plan expansion, but negotiations continue in the Senate.
Since 1986, scholarship and grant amounts used for room and board are taxable to the student or family. Amounts used for tuition expenses are not taxable. Also that same year, the “Kiddie Tax” was signed into law. The Kiddie Tax was implemented to prevent wealthy taxpayers from hiding income in their children’s accounts to avoid taxes. Since then, scholarship and grant amounts above the allowable amount to avoid a Kiddie Tax ($2,100 annually) have been taxed at the student/family rate. Starting in tax year 2018, those amounts are taxed as an estate or trust, often as high as a 37% rate, resulting in alarming and unexpected tax bills for these families.
As a result of the 2017 tax reform law, tax rates were changed in an effort to simplify the tax code by incorporating more universal rates across the board, rather than different rates for different benefits.
Prior to the 2017 Tax Cuts and Jobs Act (TCJA), rates for scholarship and grant amounts were taxed at the parents’ rate. TCJA, however, changed the code so these resources would be taxed at the rate of estates and trusts. The result was that students and families with substantial room and board grant awards were seeing surprisingly high tax bills. This was especially true for low income students, athletes, and travel abroad students who were hit particularly hard.
The rate change also affected other groups of taxpayers, including: children of service members killed in the line of duty (Gold Star families) and children of first responders.
H.R. 1994 repeals the tax rate change for all categories of individuals affected by the TCJA.
The Senate, however, has already passed retirement legislation that only repeals the benefit for Gold Star families. The Senate is indicating it could adopt the House language separately under unanimous consent, but Senators are not happy that the House bill repeals the ability for IRC Sec. 529 plans to be used for K-12 and homeschooling expenses. One attempt at unanimous consent was blocked due to the elimination of the Sec. 529 plan expansion, but negotiations continue in the Senate.
Since 1986, scholarship and grant amounts used for room and board are taxable to the student or family. Amounts used for tuition expenses are not taxable. Also that same year, the “Kiddie Tax” was signed into law. The Kiddie Tax was implemented to prevent wealthy taxpayers from hiding income in their children’s accounts to avoid taxes. Since then, scholarship and grant amounts above the allowable amount to avoid a Kiddie Tax ($2,100 annually) have been taxed at the student/family rate. Starting in tax year 2018, those amounts are taxed as an estate or trust, often as high as a 37% rate, resulting in alarming and unexpected tax bills for these families.
For more information, please contact:
Karin Johns