Credit Union Tax Exemption

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Updated May 2013

The 1934 Federal Credit Union Act (FCUA) stated credit unions receive a tax exemption because "credit unions are mutual or cooperative organizations operated entirely by and for their members." Credit unions are eligible for tax-exempt status if they meet the following criteria:

Operating on a not for profit basis

Organized without capital stock

Operating for mutual purposes

In 1998, as part of the findings of the Credit Union Membership Access Act (P.L. 105-219), Congress found that, "Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member owned, democratically operated, not for profit organizations, generally managed by a volunteer Board of Directors, and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means."

Still, credit unions do pay many taxes and fees, among them payroll and property taxes. It is also important to note that share dividends paid to credit union members are taxed at the membership level. Critics argue that credit unions today are no different than banks. However, the defining characteristics of a credit union, no matter what the size, remain the same today as they did in 1934: credit unions are not-for-profit cooperatives that serve defined fields of membership, generally have volunteer boards of directors and cannot issue capital stock. Credit unions are restricted in where they can invest their members' deposits and are subject to stringent capital requirements. A credit union's shareholders are its members and each member has one vote, regardless of the amount on deposit, while a bank has stockholders.

During the 112^th Congress, as part of broader legislation to raise the country's debt ceiling, Congress established a Joint Select Committee made up of 12 Members of Congress that had the goal of cutting an additional $1.5 trillion from the federal deficit. Everything - from spending to taxes - was on the table for the Committee's review. A majority of the Committee's members failed to agree on a legislative package by the deadline mandated by law. Subsequently, a process known as "sequestration" was triggered with across the board automatic spending cuts that were initially scheduled to take effect beginning in 2013. NAFCU closely followed developments with the Joint Select Committee.

In December 2012, Congress worked to avoid the "Fiscal Cliff" of issues our country faces including the expiration of the Bush-era tax cuts. As you may know, a last minute deal was reached that would extend current tax rates on annual household income under $450,000 and for individuals under $400,000. While the Fiscal Cliff deal does not impact the credit union tax exemption, it does help set the stage for the debate about larger corporate tax reform in the 113^th Congress which was sworn in on January 3, 2013.

Soon after the new Congress was sworn in, House Ways and Means Chairman Dave Camp (R-MI) set up a series of tax reform working groups to educate members of the tax writing committee about the intricacies of the tax code in advance of reform efforts. The working groups efforts culminated in the May 6^th report issued by the Joint Committee on Taxation which provided an overview of the tax code and summarized reform suggestions and other commentary submitted by the public. NAFCU met and actively engaged with key members of the working groups as NAFCU's number one priority remains ensuring protection of the credit union tax exemption.

You can assist in these efforts by downloading NAFCU's study on the benefits of the credit union tax exemption and then contacting your local Members of Congress to share this information with them.

If credit unions are taxed, over time there will be many consequences for credit union members. Possible outcomes include:

Credit Unions Would Lose their Identity: By necessity, credit unions would have to increase profits and customer service would likely suffer

Rates and Fees: If the exemption is repealed, it would adversely impact savings and borrowing rates as well as increase fees

Capital: Further restraint on the ability to raise capital potentially impacts safety and soundness

Erosion of the Volunteer Base: As credit unions become "more like banks," the self-help, volunteer characteristic of credit unions, and the community as a whole, would become less distinct