This story is about a big mistake in the tax law that President Trump signed at the end of 2017, and how it's come back to haunt a group of people who we all agree deserve better.

I'm talking about the children of fallen service members -- and especially the young children growing up without their dads or moms, who gave the ultimate sacrifice to our nation.

I think the whole thing was a mistake -- either a drafting error, or somebody not realizing what changing a few small words would do to the whole law. I'd also bet my entire net worth that Trump didn't actually know it was in the bill when he signed it, and would want it to be "fixed" immediately if he did know about it.

But it's probably going to be much harder to fix than most people think.  

'The Kiddie Tax'

The independent military website Task & Purpose reported on this first.

The problem in short, starts with the fact that widows, widowers and orphans of deceased service members are entitled to survivor benefits. Due to a change in the law that Trump signed, however, children who had the benefits assigned to them have to pay a much higher tax rate on those benefits: potentially 37 percent instead of 15 percent.

This comes about because of a bigger change, which affected something called the "Kiddie Tax," which is a tax structure for unearned income allocated to children. Think of a wealthy child whose parents give him or her a big stock portfolio and who thus has thousands or millions of dollars in dividend income every year.

The new tax law doesn't make a distinction between that unearned "Richie Rich" situation, and children who are receiving payments because their parent was killed in a war.

In other words, it says that kids who get the benefit only because their parents were killed in the line of duty haven't actually "earned" the income. Sounds wrong, right?

"My kids are owing the government back money, that the government gave them, because their dad died, and my kids have to pay it back," Theresa Jones, whose husband Navy Lt. Cmdr. Landon Jones died in a helicopter crash in 2013, told the website.

Much harder to fix

Again, I assume this was unintentional, but it's what happens when -- as happened in the fall of 2017 -- one party in Congress draw up a massive, super-complex law in secret, unveils it to the opposition party just before a vote, and rushes to pass it before an artificial deadline.

That's why I call this the "Last Minute Tax Law," which Trump signed literally the Friday before Christmas. I remember hustling to try to even get an appointment with my accountant during that one week before the end of the year. It wasn't pretty.

If you pay a lot of attention to Washington, you will know both parties have done this kind of thing over the years, pushing through legislation with bare support. But in this case, it's military kids who are among those footing the bill.

I won't rehash them all here, but the government has previously managed to "fix" things in the tax law that probably would have had a lot less public support.

My favorite among these includes a drafting error that could have meant some very wealthy people would each miss out on a massive multimillion dollar tax cut.

There was also the accounting change to fix an accidental $133 billion tax increase across the board, and the weird quirk that was pushing some married couples to get divorced fast for tax purposes.

But fixing this mistake that screws over the children of deceased military members could be a lot trickier.

On the books for years?

The easier way to fix something like this is to have the IRS simply declare that military survivor payments are not "unearned income," which would except the benefits from the Kiddie Tax. 

However, it's not clear that the IRS has that power, even though it's the kind of thing they did to fix the accidental tax increase on millionaires I described above.

So this probably falls on Congress to actually amend the 2017 tax law. And in fact, there's a bipartisan group in Congress calling to do exactly that. 

But you might remember that there isn't one party control in Congress anymore, and Republicans are wary of reopening the tax law because it would mean Democrats could start pushing for other changes as well.

All of which means this massive tax increase on the orphans of America's heroes might be on the books for years to come. 

Published on: May 5, 2019
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