California Indians and California tax
California is home to more than 265,000 American Indians and Alaska natives, according to a 2006 update to Census 2000. Although the largest numbers are concentrated in the population centers of Los Angeles, Orange, Riverside, and San Diego Counties, each of California's 58 counties has a population of American Indians. Most belong to one of the dozens of California Indian tribes and communities.
Many people are under the impression that California Indians do not pay income tax. In some cases, this is true – however, in many circumstances California Indians do pay income tax. What are the determining factors? The answers to many questions about income earned by California Indians, and its taxability, are offered below.1. What is Indian country?
Indian country is:
- All land within an Indian reservation under jurisdiction of the U.S. Government, including rights-of-way running through the reservation.
- All dependent Indian communities within the borders of the United States under the jurisdiction of the U.S. Government.
- All Indian allotments, the Indian titles to which have not been extinguished, including rights-of-way running through the allotments.
Yes. Even if they live in Indian country, they are considered California residents.3. I have clients who are Native American. Are their earnings exempt from California income tax?
Generally, California taxes the entire income of residents of the state, and the California source income of nonresidents. If your clients meet all of the following requirements, their income is exempt from California income tax:
- They must be members of a federally recognized Indian tribe.
- For a list of all federally recognized tribes, go to the IRS website at www.irs.gov. Search for federally recognized tribes. A list is available in Internal Revenue Service Bulletin Number 2002-42, Rev. Proc. 2002-64 (page 718).
- They must live in their tribe’s Indian country, which includes reservations, dependent Indian communities, and Indian trust allotments.
- The income they earn must be sourced in the same Indian country in which they live, and where they are tribal members.
Their tribally sourced income is exempt from California taxation if they meet all the requirements. However, California taxes income that is earned outside of Indian country. This includes income your clients earn from tribes of which they are not members, or income they earn outside California. This also includes income from other sources in Indian country.5. What if all my clients’ income is from Indian country sources, but they live outside Indian country?
If your clients live outside of Indian country and within California, California taxes all income including income from Indian country sources.6. What if my clients are California residents, whose only income is from sources outside Indian country or from sources outside California?
For California purposes, their entire income is taxable. California taxes the entire income of residents.7. One of my clients is on active duty status with the U.S. military. His station is in California, but his military orders require him to live outside Indian Country. Does California tax his military pay if he is a member of a California tribe?
No. California treats members of California tribes on active duty status as if they live within Indian country. California considers his military income to come from tribal sources, and does not tax it.8. What if my clients live outside of California, but receive casino income from California Indian country sources?
If your clients are nonresident Native Americans, California does not tax their share of income from tribal casino operations. California may tax other income, such as wages received from California sources while a nonresident. For more information about California residency, get FTB Publication 1031, Guidelines for Determining Resident Status.9. Do my clients have to file California income tax returns if they live in California Indian country and all of their income is from the Indian country source where they live as tribal members?
No. California does not require them to file an income tax return. However, we recommend they file the return to show the amount of exempt income as an adjustment on Form 540, Schedule CA. Also, if their income sources withhold tax from that income, they must file a California resident income tax return to obtain a refund of the withholding amount.10. What documents should my clients attach to their California income tax returns?
Attach copies of Form 1099, Miscellaneous Income, and Form W-2, Wage and Tax Statement that show the details of their tribal income and non-tribal income.11. Should they attach a declaration regarding their tribal membership, income sources, and places of residence?
No. Do not attach additional documents to their returns. If they claim some or all of their income is exempt from California tax, show the adjustments on the Form 540, Schedule CA, California Adjustments, other income line. Also, if they use a PO Box, please list their physical addresses in the blank spaces we provide on the Form 540 Schedule CA, “Other Income” line.12. Should my California Indian clients keep certain documents for state income tax purposes?
Yes. They should keep documents that establish their tribal source of the income, and documents that establish their place of physical residence. They will need the information if we examine the income exclusion for earned income from Indian country sources. If we contact them and request this information, they must respond in a timely manner even if they believe their income is exempt and/or they did not file a California income tax return.13. What documents should my clients keep to support their income exclusions for income earned in their tribes’ Indian country?
Your clients should retain these documents:
- Form 1099-Misc and Form W-2 if they did not attach them to their California returns.
- Their federal tax return if they did not attach them to their California returns.
- The declarations page from their homeowner or renter insurance policies showing their Indian country addresses.
- The declarations page from their automobile insurance policies showing their Indian country addresses.
- Department of Motor Vehicles documents showing their Indian country addresses (California driver's license and any vehicle registrations).
- Utility statements showing their Indian country addresses, or a letter from a utility company that shows:
- The customer and mailing address.
- The service address.
- The timeframe the utility provided service at that address.
- Any other documents they believe verify or establish their residence such as school records.
Your clients should gather the following documents at the time they file a California return:
- A declaration by their parents, relative, or friend that shows each of the following:
- The physical address of their living accommodations.
- The time period when they lived there.
- Utility statements, or a letter from a utility company that shows:
- Their parent’s, relative’s, or friend’s customer mailing address.
- The service address.
- The timeframe the utility provided service at that address.
- Any other documents your clients believe verify or establish their residence, particularly if the document lists their names. See the list in the answer to the preceding question.
We do not require proof from your client’s tribe. If you get the documents from your client’s tribe, it is not enough for the tribe to merely report your client’s primary address or address of record. Your client must provide documents that support where he or she claims to live, and the time period he or she lived at the location.16. I have clients that own or rent more than one home. If they possess a home in Indian country, is possession sufficient to make their income exempt from tax?
No. They must show that their Indian country residence is the residence in which they lived during the period in question. In addition to the documents they need for their primary homes, they should save documents that pertain to their second homes. For example, they should keep their lease agreements that list their tenants, or utility bills in their tenants' names.17. What is per capita distribution?
Indian tribes that conduct gaming activities on a California reservation may use gaming profits for the general welfare of the tribe and its members. The law allows tribes to distribute gaming income to each member (per capita) of the tribe after tribal obligations are met or accounted for. Whether or not the per capita payments are taxable by California depends on where the tribal member lives. Keep in mind that per capita income is subject to federal tax regardless of where tribal members reside.18. I have California Indian clients that are married, and live in the wife’s tribe’s Indian country. Is the husband’s per capita distribution from his tribe exempt from tax?
No. The wife’s income is exempt from tax, but the husband must live in his own tribe's Indian country for his income to be exempt from California taxation.
If the tribal member resides The Per Capita income
- On his own tribe’s reservation in California Is not taxable by California
and derives income from that tribe
- Off the reservation in California, even if living Is taxable by California
on his spouse’s tribe’s reservation in California
- In another state, and is not a California resident Is not taxable by California
No. The entire income of a non-Indian spouse is subject to taxation, regardless of whether the non-Indian spouse lives on tribal lands.20. Where can my clients and I get more information, and find tax forms
Assistance for persons with disabilities: We comply with the Americans with Disabilities Act. Persons with hearing or speech impairments, please call TTY/TDD 800.822.6268.
Tax forms and publications:
Mail: TAX FORMS REQUEST UNIT
FRANCHISE TAX BOARD
PO BOX 307
RANCHO CORDOVA CA 95741-0307
If you would like to have this information in brochure form to distribute to your clients, you can download Frequently Asked Questions About the Taxation of Native Americans (FTB 674) from our website at ftb.ca.gov (search for “Native Americans”). For information on California Indians and military duty, get FTB Publication 1032, Tax Information for Military Personnel.
The IRS website provides detailed and in-depth information on the federal taxation of Native American income. For general information on Indian tribal governments, you may want to begin with the FAQs for Indian Tribal Governments Regarding Miscellaneous Issues. More specific tax information is discussed in their FAQs for Indian Tribal Governments Regarding Taxable and Nontaxable Distributions.
The 2006 American Community Survey reported 265,963 American Indian and Alaskan Natives in California.