Tax Laws for Tribes Bring Social Security Options and Payment Impacts to Minors

As Public Law 115-243 went into effect on September 20, 2018, tribes now have the option to enter into an agreement with the Social Security Administration (SSA) that would allow tribal council members to pay into and receive Social Security benefits, including Medicare.

Tribal Social Security Fairness Act of 2018

This law allows tribal council members options comparable to those offered to elected officials from state and local governments. The option is a voluntary agreement and each tribe has its own unique circumstances to consider before entering into an agreement with SSA. Tribes should assess the below factors when making a decision.

  • The agreement would impact all members of the tribal council and includes all services performed by them in their capacity as council members.
  • The agreement would cover all positions within the covered group, which in this case includes all tribal council members.
  • Once a tribe enters into the agreement, the tax payment requirement and corresponding benefits would be available to all current and future council members after the effective date specified in the agreement.
  • After entering into the agreement, a tribe may not revoke coverage for council members and individual council members may not opt out of participating in the program.

Additionally, a tribe may request Social Security credit for prior and current tribal council members who paid such taxes before entering into the agreement as long as the taxes were paid in good faith and not previously refunded.

Minors’ Trust Distributions

The 2017 Tax Cuts and Jobs Act included revised tax rules related to the treatment of investment and unearned income for children, often referred to as the kiddie tax. The kiddie tax applies to children under the age of 19 and full-time students under the age of 24 and covers payments received as distributions from a minors’ trust. 

New Tax Rates

The new tax rules now require minors’ trust distributions to be taxed using the trust tax rates instead of being taxed at their parents’ tax rate. In general, these changes will result in a higher tax impact on such minors’ trust distributions because the trust tax rate increases to 37% when the taxable unearned income is greater than $12,500. The trust rates are published in the Form 1041-ES instructions and updated at least on an annual basis.

For example, the 2018 kiddie tax liability associated with a $100,000 minors’ trust distribution would be $35,386 when paid to a minor or full-time student under the age of 24. In the past, the tax liability associated with this distribution was based on their parents’ tax rate, which generally produced a much lower tax liability. For example, if the parents’ rate was in the 20% tax bracket, the minors’ trust distribution tax would have been $20,000. 

Tribal Impact

Given these changes, it’s important to consider how this rule may affect taxes owed by minors upon distribution of minors’ trust accounts. Tribal councils and general membership councils should discuss whether now is the time to consider changing the structure or timing of minors’ trust distributions based on the new tax law. Such consideration might include certain strategies such as staggering or delaying distributions to potentially reduce the tax impact on minors. This is also an opportune time to educate minors about these tax changes so that you set an appropriate expectation on the taxes they may owe. 

General Welfare Update

Another issue currently facing tribal members is the classification of payments received for performing certain services during traditional ceremonies, such as cooking food or being a flag bearer. Some question if such payments are considered benefits under the General Welfare Act or compensation for services that would be taxed as employment or contract services. 

Based on our understanding of the General Welfare Act and discussions with the IRS, such payments for services rendered at a cultural event shouldn’t be considered taxable compensation. Although the act’s safe harbor rules specifically mention religious or spiritual officials or leaders, it does so to differentiate compensation for services at a cultural event from those at a religious event such as spiritual official getting paid for performing services at a wedding. The intent of the act would generally treat cultural performance of services as a general welfare benefit rather than as taxable compensation.

We’re Here to Help

To learn more about how these tax rules may affect your tribe, contact your Moss Adams professional or visit our dedicated tax reform page.

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