Congress fails to reach pre-Memorial Day tax fix for Gold Star families

That's what happened this week when Congress tried to resolve a wrinkle in the Republican tax law that resulted in thousands of Gold Star families getting hit with unexpected tax bills this year.

Lawmakers in both parties called for passing a fix before Memorial Day. Instead, they will have to wait until after their upcoming recess, thanks to House Democrats' decision to fold it into a larger retirement measure that drew opposition from Sen. Ted Cruz.

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The Texas Republican doesn't object to fixing the tax issue for Gold Star families -- the spouses and children of fallen service members. But he made clear he would have stopped the fix from moving through on a unanimous consent vote before lawmakers left town Thursday, two Senate GOP aides said, because the attached legislation regarding tax treatment of retirement savings didn't include changes Cruz wanted on a separate issue: 529 college savings plans.

Cruz wants to include language to extend uses of the accounts to homeschooling expenses, tuition, books, tutoring, college admissions test prep and therapy for children with disabilities.

"I'm pressing to include the language expanding 529 accounts that passed the House Ways and Means Committee unanimously," Cruz told CNN. The provision was stripped from the final bill after pushback from advocacy groups like the American Federation of Teachers and the National Education Association, reported by Politico earlier this month.

Asked about what his efforts meant for delaying tax fixes for Gold Star families, Cruz noted he was a cosponsor of the Senate bill to address the problem.

"It's the right thing to do, and I'm confident we will get it done," he said. "We can also act for the benefit of school kids all across the country. We can do both."

The problem emerged this spring as families discovered that survivor benefits paid to children were suddenly being taxed like inheritances. That change in the 2017 Republican tax bill was intended to simplify how the tax code deals with unearned child income, such as estates and trusts.

Prior to the tax bill, a Defense Department benefit that spouses of fallen service members often designate to their children was taxed at the parent's rate, which was on average about 12 to 15%, according to the Tragedy Assistance Program for Survivors. This year, some families instead had to pay rates of up to 37%.

The change was first reported in April by the military-focused publication Task & Purpose, prompting outcry from lawmakers.

Action on the issue was hasty, by congressional standards.

On Tuesday, the Senate approved the Gold Star Family Tax Relief Act by unanimous consent. The bill would treat survivor benefits as earned income, instead of as if it were an estate or trust. It would also be retroactive, so families who suffered this year could recoup the costs.

Procedurally, because the House has to have first say on revenue-related legislation, the Senate's unanimous approval of the bill actually meant that if the House had sent over identical legislation introduced by Democratic Rep. Elaine Luria of Virginia, it would have been considered passed.

But the House didn't send over identical legislation. Instead, Democrats folded an expanded version of the fix into a larger bipartisan retirement bill.

Including the tax relief provision for Gold Star families helped smooth the retirement bill's path to passage in the House -- but it provoked Cruz into halting it over the college savings plan dispute.

The Senate GOP aides indicated the retirement bill would be considered quickly by the Senate when Congress returns, but it's not clear whether Cruz will get his way.

"This legislation is an example of bipartisan cooperation to solve issues on behalf of Americans," Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, said in a statement after the House overwhelmingly passed the measure 417-3 on Thursday. "I appreciate the hard work of my colleagues in the House and look forward to its quick passage in the Senate."

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