Why the sudden concern with credit union tax status?
Lawmakers are reviewing various ways to reduce the national budget. One option being reviewed is the credit union industry's tax status. Here, we discuss the current situation and what effects members can anticipate with a tax status change. Right now, credit unions don’t pay federal taxes; however, they do pay others, such as employment and property taxes.
Why don’t credit unions pay certain federal taxes?
Credit unions are not-for-profit organizations because they are owned by members who have accounts with the organization. They are in business to serve their members' financial needs, not to make money for outside investors.
- Member Ownership: When you join a credit union, you’re not just a customer; you’re also a part-owner. A credit union board of directors must be made up of members. They are volunteers who represent the membership in the services offered.
- Reinvested Profits: Instead of paying stockholders, credit unions reinvest their profits back into the institution to provide members more value. This usually comes in the form of lower loan rates, higher deposit rates, and fewer and/or lower fees. For example, PrimeWay was one of the first institutions in the nation to offer an overdraft service program on checking accounts, with no fees for the service.
- Community Focus: Credit unions often prioritize financial education and being active in local communities. Strong communities help members. While many credit unions make business loans, they serve small business owners who are the backbone of America, rather than international corporations.
How Could These Changes Affect You?
Impact on Loan Rates
Credit unions are known for offering affordable loans for big purchases such as homes, cars and education. If credit unions face new taxes, they may be forced to:
- Raise loan Rates: This means you could end up paying more over time for a mortgage or auto loan.
Imagine needing a loan for a new car or to fix up your home. A higher interest rate means more money paid over the life of the loan. That extra cost could have been saved or used for other needs.
Impact on Fees
Credit unions generally charge lower fees compared to banks. These fees can include charges for checking accounts, ATM use and other services. With the extra tax burden:
- Fee Increases: Credit unions may raise fees to help cover the tax costs.
For everyday budgeting, every extra fee can make a difference. The reliable, low-cost service you’ve come to depend on might become more expensive, impacting your overall financial health.
Long-Term Financial Stability
Credit unions like PrimeWay help many people build a stable financial future. They offer not only low fees and rates but also:
- Better Savings Options: Allowing members to save money for emergencies or future investments.
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Community Investment: Credit unions often reinvest in local communities, supporting small businesses and local projects.
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Credit Building: Helping members build a strong credit history through responsible lending.
If the credit union tax structure changes, these long-term benefits may be weakened. Over time, communities could see less investment and fewer opportunities for affordable financial products.
How Do Credit Unions Differ from Banks?
Banks are typically for-profit institutions. Their goal is to earn money for their shareholders, which often results in higher fees and interest rates. Key differences include:
Mission:
- Credit Unions aim to serve their members and support the community.
- Banks focus on profit for external investors.
Cost:
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Credit Unions usually offer lower fees and better interest rates.
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Banks often charge more because they need to generate profit.
Service:
- Credit Unions often provide a friendlier, more local service, with local credit decisions
- Banks can be more impersonal due to their size.
Community Reinvestment Act:
- Credit Unions are often heavily involved in their local communities, providing assistance to low-income organizations and communities. Credit unions do not get additional benefits for doing so, it is simply the right thing to help make financial services available and affordable for all.
- Banks can also be involved in their local communities; however, banks do receive additional benefits for their participation. (Credit unions are not opposed to banks receiving an incentive to do the right thing.)
For someone managing daily expenses, these differences mean more money saved on everyday loans and fees. For a careful planner, the lower costs can add up to significant savings over time.
Key Differences: Credit Unions vs. Banks
| Criteria | Credit Union | Bank | Winner |
|---|---|---|---|
| Fees | Lower fees | Higher fees | Credit Union |
| Interest Rates on Deposits | Higher rates | Lower rates | Credit Union |
| Customer Service | Personalized | Impersonal | Credit Union |
| Loan Approval | Easier | Harder | Credit Union |
| Loan Rates | Lower rates | Higher rates | Credit Union |
| ATM Network Access | Varies; some have many free ATMs | Usually many free ATMs | PrimeWay Federal Credit Union offers access to over 55,000 No-Fee ATMs |
| Online Banking | Varies; some have great online banking | Usually good online banking | PrimeWay's online app ranks among the best, with a 4.9 score from thousands of reviews. |
| Operational Philosophy | Not-for-profit; benefits members | For-profit; benefits shareholders | Credit Union |
The Community Impact: Beyond Personal Finances
Supporting Local Economies
Credit unions do more than serve individual members; they play a key role in local economies by:
Providing Affordable Credit: Helping people buy homes, start businesses or pay for education.
Investing Locally: Many credit unions use their profits to support local projects, create jobs, and help small businesses.
Promoting Financial Literacy: Offering classes and advice that help community members manage money better.
If credit unions lose their tax advantages and are forced to start acting like banks, these benefits might be at risk. Money that once supported community projects could be redirected to cover higher operating costs. This could lead to fewer loans for local businesses and less investment in community programs.
These are the basic differences between credit unions and bank tax structures. Like many things in this world, because of the difference in mission—being in business to serve members versus being in business to make money for investors—there are differences in organizational benefits. While credit unions are exempt from some taxes, they don’t have the same freedom of investments to earn money as banks; they don’t receive benefits from the Community Reinvestment Act, to name just a few of the bank advantages. Now you have the facts.
If you wish to make your voice heard, below are links to find your local legislators quickly and easily.
Texas State Senator & House Representative:
https://wrm.capitol.texas.gov/home
U.S. House Representative (Congress):
https://whoismyrepresentative.com
Are credit unions tax exempt? Learn about the tax status of credit unions in the US, including the reasons behind their exemption and potential impacts on members.