You might call it a case of haste makes waste. The tax cut bill that passed Congress in late 2017, less than two months after an initial version was introduced in the House with nary a public hearing or input from the minority (Democratic) party, has delivered an unexpected tax bill to college students on scholarship.
That portion of their financial aid that pays for anything but tuition and books, known as non-tuition assistance, is considered unearned income and taxed at the same rate as trusts and estates, as a result of the 2017 tax cut legislation. Those rates are 35% on unearned income above $9,150 and 37% on unearned income over $12,500.
The 2017 tax cut legislation dramatically changed the rate on the kiddie tax — which applies to unearned income for almost all children under 18 and many up to age 23 above $2,200 in 2019 after deductions — from the rate of a students’ parents to the trust tax rate.
In a May 9 letter to the chairmen and ranking members of the House Ways and Means Committee and Senate Finance Committee, Ted Mitchell, president of the American Council on Education, noted that the tax change hurts need-based scholarship students, who “are being taxed at the same rates as wealthy individuals,” as well as college athletes on full scholarships, which include funds for housing and other non-tuition expenses, and potentially the 1.4 million students who receive other scholarships and grants. Also affected are the children of deceased military members who receive survivor benefits.
“I am confident that the adverse impact from the [Tax Cuts and Jobs Act] changes to the kiddie tax is an unintended consequence, which I believe you will be anxious to correct,” Mitchell wrote.