By the CUJ
Changes to the United States tax code have a major impact on “18 Money” and the youth of the Umatilla Indian Reservation.
In April, the Enrollment Office for the Confederated Tribes of the Umatilla Indian Reservation sent letters to households explaining different options, including one that encourages tribal youth and their families to select an option to defer proceeds into four equal payments rather than a lump sum.
“18 Money” is unearned income from gaming dividends that is deposited into two trusts. The first trust is called the Custodial Trust, and the money that goes there is taxed before it is deposited. The second trust is called the Rabbi Trust and that money is not taxed until it is withdrawn. The Rabbi Trust money, distributed to tribal members when they turn 18, is affected by the changes to the tax code.
Unearned income has always been taxed under the terms of Section 11001 of federal tax code, commonly referred to as the Kiddie Tax.
Previously, the Kiddie Tax taxed withdrawals from trusts at the tax rate of the youth’s parents as they are claimed as dependents. However, that has changed due to the 2017 Tax Cuts and Jobs Act. Now, this same type of money is taxed at a progressive tax rate of up to 37 percent.
Each amount of an individual disbursement is taxed at a different rate with the highest being 37 percent. The first $2,550 is taxed at 10 percent. From $2,551-$9,150 is taxed at 24 percent. From $9,151 to $12,500 is taxed at 35 percent. Anything $12,501 and above is taxed at 37 percent.
In general, tribal revenue is exempt from Federal taxes. However, due to the Indian Gaming Regulatory Act, per capita gaming dividend disbursements are taxed.
The Board of Trustees discussed the tax implications during a March 28 work session in the BOT chambers.
Tribal attorney Dan Hester, speaking to the BOT on a conference call, made two recommendations in his memo to the Board. The first is to make changes to the CTUIR Gaming Revenue Allocation Plan (GRAP) “to require that distributions from the Rabbi Trust account be provided in 4 equal installments beginning when the minor turns 18 years of age.”
According to Bruce Zimmerman, CTUIR Tax Administrator, each individual’s tax rate is determined by their specific circumstance, and he encouraged families to meet with certified tax professionals to discuss the specifics of their situations.
He also explained in an email to the CUJ that the Kiddie Tax rate applies when an individual meets all of the following criteria:
“1. You had more than $2,100 of unearned income.
2. You are required to file a tax return.
3. You are either:
a. Age 18 at the end of the year and didn’t have earned income that was more than ½ of your support, or
b. A full-time student at least age 19 and under age 24 at the end of the year and didn’t have earned income that was more than ½ of your support.
4. At least one of your parents was alive at the end of the year.
5. You don’t file a joint tax return.
If all of the above conditions are not met, then the individual would not be subject to the “kiddie tax” on the Rabbi trust distributions, but would rather be subject to paying taxes using the ordinary income tax rates. This would also be true for years 2 to 4 [of a deferment],” Zimmerman said.
Going from one lump sum at age 18 to deferring to four equal payments ultimately decreases how much taxes are paid due to the progressive structure of the Kiddie Tax.
“Under the GRAP, a minor may request a deferral of his/her Rabbit Trust fund proceeds in equal installments over a 4 year period provided that the request is in writing and is provided to the Trustee before the minor turns 17 years of age,” according to Hester’s memo.
The newest letter explains the changes to the tax code and encourages tribal youth and their families to select the option to defer.
During the work session, Minthorn said, “We really want to encourage youth who will be turning 18 to defer.”
Once a decision is made either way, to take a lump sum or to defer it over four years, the decision is irrevocable due to the regulations on tax deferred trusts, according to Hester.
The Enrollment Office will also engage in personalized outreach in the form of follow-up phone calls to the target audience, which Minthorn explains is youth who will be turning 17 soon.
“The point of the account is to maximize how much youth see from gaming revenue,” Hester said of the Rabbi Trust.
When Chairman Burke asked during a March 28 work session why the BOT was not briefed on this tax act during legislative briefings, Minthorn responded that no one saw this coming. She explained that as far as she knew no one was aware of the implications in Indian Country until people started filing their taxes last month. Hester said that no one saw it coming earlier because it was “buried in an obscure provision of a 2,100 page tax code,” and it was not known that this provision would have implications in Indian Country.