AALU wants members of Congress to know that the Setting Every Community Up for Retirement Enhancement Act bill, or Secure Act bill, includes a provision that could help Gold Star families.
Gold Star families are the immediate relatives of service members who have died in combat or in military support activities.
Marc Cadin, chief executive officer of AALU, pointed out in a statement in support of the Secure Act bill last week that a bill provision “safeguards financial security for Gold Star families.
The provision provides a tax rule change for children who get survivor benefits as the result of the deaths of service member parents.
The TCJA Child Unearned Income Provision
As a result of a tax code change in the Tax Cuts and Jobs Act of 2017 (TCJA), the Internal Revenue Service now applies a high tax rate to any significant amount of unearned income going to children.
When the child of a fallen service member gets military survivor benefits, that now triggers the TCJA child unearned income provision. The TCJA provision may increase the child’s effective tax rate to 37%, from 12% to 15% under the pre-TCJA tax rules, according to a summary of the final House version of the Secure Act, H.R. 1994, that was distributed by House leaders in May.
Rep. Elaine Luria, D-Va., proposed a bill, H.R. 2481, that would have reclassified military survivor benefits going to children as earned income.
The related provision now in H.R. 1994, Section 501, solves the children’s military survivor benefits tax problem by nullifying the effect of the TCJA child unearned tax provision on all unearned income going to children.
Although the current Section 501 appears to have a broad effect, most bill summaries describe the provision as a provision intended to help child survivors of service members who die in combat or combat support roles. The most recent House Rules Committee, Congressional Budget Office and Joint Committee on Taxation summaries and analyses of H.R. 1994 either leave out any mention of the provision, or simply show the provision would have modest impact on the federal budget, without discussing what the provision would do. It’s possible that congressional leaders will eventually narrow the scope of the provision to apply solely to children who receive survivor benefits, or solely to children who are eligible for the benefits that go to the dependents of service members killed in the line of duty.
H.R. 1994 in the Senate
H.R. 1994 includes many provisions of interest to life insurers and financial professionals, including a provision that would encourage employers to add annuitization options to 401(k) plans, and a provision that would let small employers joint together to offer multiple employer retirement plans.