As the Republican-led Congress and White House move forward on the repeal of the Affordable Care Act and major tax-reform legislation, there are several new opportunities that may benefit tribal governments and their members.
While some provisions have potential to positively impact Indian Country, it is important to keep in mind that a complete restructuring of the tax code also may have unintended adverse consequences for tribal governments.
Here is an overview of six existing tax benefits that should continue to receive attention this year by tribal leaders seeking to maximize potential tax saving for their members.
As the Republican-led Congress and White House move forward on the repeal of the Affordable Care Act (ACA) and major tax-reform legislation, there are several new opportunities that may benefit tribal governments and their members. Among the examples are the prospective reduction in individual tax rates, the advancement of provisions recognizing the governmental status of tribal governments consistent with state governments and consideration of tax credits or other tax incentives for infrastructure and industrial development on Indian reservations.
While these provisions have potential to positively impact Indian Country, it is important to keep in mind that a complete restructuring of the tax code also may have unintended adverse consequences for tribal governments. For this reason, tribal leaders must remain vigilant in their efforts to preserve existing tax immunities and other provisions that reduce federal and state tax burdens on tribes and tribal members. Here is an overview of six tax benefits that tribal members currently enjoy that may receive attention in 2017.
1. Excludable Health Insurance and Health Benefits
In the wake of the election, Congress has begun the process of repealing and replacing the ACA. Among the concerns still needing answers are what healthcare will look like under the Trump Administration, and how the millions of Americans with coverage under the ACA will receive healthcare post-repeal. While Congressional leadership has yet to endorse a particular legislative package, the replacement for the ACA is likely to include (a) continued disregard for preexisting conditions, (b) allowing adult children to stay on a parent’s plan until age 26, and (c) providing government-subsidized insurance coverage for low-income uninsured Americans. The employer mandate, a widely unpopular provision among most employers and tribal governments, likely will not be retained.
While these provisions may be beneficial for Indian Country, tribal leaders will be left to defend a number of helpful provisions codified in the ACA that specifically benefit tribal members. A prime example was the ACA's addition of Section 139D to the Internal Revenue Code. Section 139D states that healthcare benefits provided by the Indian Health Service (IHS), a third-party program funded by the IHS, medical care purchased by the tribe or tribal organization, coverage under accident or health insurance and any other medical care provided by the tribe or tribal organization is excluded from the gross income of tribal members, and thus exempt from tax. If Section 139D is repealed as part of the proposed "repeal and replace" of the ACA, some tribal healthcare benefits may be subject to taxation when received by tribal members. However, even if that should occur, it is believed that such benefits could then qualify for exclusion under the Tribal General Welfare Exclusion Act.
2. Payments Pursuant to General Welfare Exclusion Programs
Section 139E of the Internal Revenue Code, enacted pursuant to the 2014 Tribal General Welfare Exclusion Act, specifically exempts payments made by an Indian tribe to its members, spouses and dependents of tribal members. This provision allows tribal governments to provide a wide range of excludable benefits ranging from education and housing to elder care and cultural programs. Under Section 139E, the exclusion applies as long as the tribal government program complies with the following requirements:
it is administered under specified guidelines and does not discriminate in favor of members of the governing body of the tribe
the benefits provided:
are available to any tribal members (including spouses and dependents) who meet the government program's guidelines
are for the promotion of general welfare
are not lavish or extravagant
are not compensation for services
To maximize the potential tax savings, a tribal program inventory should be undertaken to make sure that the tribe's existing programs comply with the statutory requirements for exclusion from income and to consider the establishment of new programs to meet the needs of the tribal membership. For more information and to access the most recent Internal Revenue Service (IRS) General Welfare Exclusion guidance, see Holland & Knight's alert, IRS Issues Guidance on Tribal General Welfare Exclusion and Safe Harbors (April 21, 2015).
3. Distributions from Non-Taxable Sources of Tribal Revenue
Almost all types of revenue are free from federal income tax when earned by an Indian tribe, but some also are free from tax when they are subsequently distributed to the tribe's members. Based on IRS guidance interpreting the Per Capita Act of 1982, the following sources of income may be earned by an Indian tribe and distributed to tribal members free of federal and state income tax:
income from leases, easements and other uses of federal trust land
income from trust resources, such as timber, mineral deposits, oil and gas
income from the sale of trust land or from damage awards related to trust land
certain tribal trust case settlements with the United States pursuant to IRS Notice 2013-1 and recent updates, such as IRS Notice 2016-48.
(See Holland & Knight's alert, Interim IRS Guidance Confirms Per Capita Distributions from Tribal Trust Resources Are Nontaxable, March 18, 2014, and also IRS Confirms Per Capita Tribal Trust Payments Not Taxable, Sept. 21, 2015.)
To date, it remains unclear if per capita distributions of revenues from leases pursuant to the Helping Expedite and Advance Responsible Tribal Home Ownership Act of 2012 (HEARTH Act) are exempt. Whether revenues from such leases could be accepted into a tribal trust account administered by the U.S. Department of the Interior’s (DOI) Office of Special Trustee for American Indians is one of the threshold issues tribes have raised with both the DOI and IRS. The IRS held a tribal leader listening session on Dec. 15, 2016, to address these concerns. As political appointments are made to the U.S. Department of Treasury, it is important for tribal leaders to remain vocal about the need for clarity on this issue. (See Holland & Knight's alert, Treasury Listening Session on Income Tax Treatment of HEARTH Act Leases, Dec. 1, 2016.)
4. Incentives for Home Ownership and Charitable Giving
For taxpayers who itemize their deductions, two of the largest potential deductions are those associated with home ownership (e.g., home mortgage interest and property taxes) and charitable contributions. These may be two of the only itemized deductions that still will be available after Congress completely restructures the Tax Code to lower individual and corporate tax rates. While a tribal member's decision to own a home or to contribute to a charitable organization is a personal one, tribal leaders can facilitate opportunities for tribal members to own a home and to obtain mortgage financing.
Furthermore, tribal leaders can work to let their members know about charitable organizations that support Indian Country priorities. Donations made directly to Indian tribal governments also are tax deductible if they are made for what the Tax Code terms "exclusively public purposes."
5. Adopt a Deferred Per Capita Savings Plan for Elective Deferrals of Gaming Revenues
Per capita distributions are fully taxable at ordinary income rates. Further, since such distributions are not considered "earned income," no portion of the revenues can be contributed by the tribal member into a 401(k) plan or other type of deferred compensation plan. However, a longstanding IRS private letter ruling and more recent IRS revenue procedures confirm that general income deferral principles apply to the taxable per capita revenues. Applying the same principles utilized by rabbi trusts to certain tribal trusts, IRS administrative guidance provides a roadmap for tribes to establish a deferred per capita savings plan that allows tribal members to voluntarily defer receipt of a portion of their per capita distribution by having it placed in a grantor trust owned by the tribe until a set date. Since this type of plan and accompanying trust can be established by the tribe only, this is again a situation where tribal leaders can provide opportunities for tribal member tax savings. Deferred per capita plans are especially useful to the extent that they allow deferral of income from a year in which the member is subject to a high tax rate to a future year in which the income may be subject to lower rates.
Of course, there are many reasons, in addition to income tax savings, that a tribal member might voluntarily decide to defer a portion of a per capita payment, including:
as part of an estate plan (particularly where the tribal member's spouse and dependents are not eligible to receive per capita payments after the member's death)
as a hedge against a downturn in tribal gaming revenues
as a means of savings to supplement a member's own income in retirement or to cover anticipated long-term care needs
Most tribal leaders have found that members appreciate having options, and this is one that a tribe can establish for its members at minimal expense. (See Holland & Knight's alert, A Tribal Financial Executive's Guide to Deferred Per Capita Plans, Sept. 14, 2015.)
6. Conduct a Tax Efficiency Audit of the Tribe's Minors Trust
Since 2003, when the IRS proposed safe harbor requirements for the creation of tax-deferred minors trusts, most tribes decided to establish grantor trusts meeting the IRS safe harbor requirements for the following reasons:
it simplifies tax compliance by the minor members and their parents by deferring taxation until actual distributions are made
in so doing, it largely eliminates Kiddie Tax filings (at least for those who do not receive distributions until they are beyond the age when the Kiddie Tax applies)
the tax-free compounding of investment returns generally offsets the potentially higher effective tax rates applicable to the cash distributions made at age 18 or older
In 2011, when the IRS finalized its minors trust guidance that included provisions allowing tribes to stagger distributions made to minors over whatever period the tribe selects, many tribes have decided to restructure their minors trust. In some cases, the trusts are being restructured to delay the age at which distributions are made and/or to include special provisions applicable to minors with special needs.
The U.S. Social Security Administration (SSA) recently provided procedures in the Program Operations Manual System for establishing who is the grantor of a minors trust and determining whether assets in such a trust count as a resource available to the trust's beneficiary. The SSA's procedures closely follow the IRS guidance on minors trusts. Accordingly, by complying with the IRS guidance, tribes also can help ensure that their disabled minors remain eligible for federal and state assistance.