Although Native American tribes are historically exempt from income tax on tribal revenues, even from gambling operations, the same doesn’t hold true for tribe members. With few exceptions, they must pay federal taxes on their incomes. The median income of those living on reservations was 41 percent less than the rest of the American population in 2006, according to the Joint Committee on Taxation. The federal government has implemented some tax benefits and credits to help these taxpayers.
Certain Native American incomes are exempt from federal income tax. If you earn your income from fishing in tribal waters, or from farming, ranching, mining or logging on your reservation, you don’t have to pay tax on this portion of your income.
Some other incomes are also exempt from taxation if your tribe has a bona fide treaty with the United States government. This exemption does not necessarily apply to every Native American. To claim it you must be able to cite the treaty in question, and the treaty must mention the exemption. The Internal Revenue Service (IRS) indicates that several treaties with certain tribes qualify, but you must be a member of the specific tribe that made the treaty to use this credit. If you’re not sure if your tribe has such a treaty, consult with a tax professional or your tribal government.
Indian Employment Tax Credit
Anyone who hires a Native American to work on her reservation can take a tax credit of up to $4,000 if she lives on or near her reservation. Hiring spouses of Native Americans also qualifies. A few exceptions exist. The employee can’t work in the gaming industry and the credit only applies to wages and salaries paid to each individual up to $40,000.
Empowerment and Renewal Zones
The IRS offers credits to employers who hire individuals for work in empowerment or renewal zones, areas of the country that are statistically under-employed and in economic crisis. Indian reservations have qualified as empowerment zones since 1997. They’re also eligible as renewal zones, however, the tribe’s state and local governments must nominate the reservation before employers there can use the tax credit. The empowerment zone credit allows the employer to take a tax credit of 20 percent of up to $15,000 of an employee’s salary or wages if the employee lives in the zone and works there for at least three months. The renewal credit is 15 percent of the first $10,000 paid to a zone employee.
You must be an enrolled member of your tribe to qualify for these tax exemptions, or for your employer to take one of the tax credits. All three tax credits for employing Native Americans expire after 2011. However, tax laws are regularly renewed and revised, so if one of these credits applies to your business or your employer in 2012, check with a tax professional or the IRS to determine whether they’re still active, or if the requirements for the credits have changed.
- Tax Credit Services: Federal Tax Credit Services
- IRS: Frivolous Arguments to Avoid When Filing a Return or Claim for Refund (PDF)
- Bureau of Indian Affairs. "Frequently Asked Questions." Accessed Oct. 22, 2020.
- Internal Revenue Service. "ITG FAQ #4 Answer: What Are the Tax Implications of Being a Federally Recognized Tribe?" Accessed Oct. 22, 2020.
- Bureau of Indian Affairs. "History of BIA." Accessed Oct. 22, 2020.
- Internal Revenue Service. "H.R.3043 - Tribal General Welfare Exclusion Act of 2014." Accessed Oct. 22, 2020.
- Bureau of Indian Affairs. "Addressing the Harms of Dual Taxation in Indian Country Through Modernizing the Indian Trader Regulations." Accessed Oct. 22, 2020.
- New York State Senate. "Section 471-E: Taxes Imposed on Qualified Reservations." Accessed Oct. 22, 2020.
- FindLaw. "California v. Cabazon Band of Mission Indians." Accessed Oct. 22, 2020.
- National Indian Gaming Commission. "Indian Gaming Regulatory Act." Accessed Oct. 22, 2020.
- State of California Franchise Tax Board. "When You Can Be Tax-Exempt: Native Americans." Accessed Oct. 22, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.