Will immigrants get a tax windfall from refundable credits?
In the end-of-the-year congressional scramble, lawmakers scuttled an effort to permanently extend a number of tax breaks—largely because many feared it would open the door to widespread use of refundable tax credits by undocumented immigrants covered by President Obama’s recent executive order. But is their concern justified?
Three sets of rules related to residency and citizenship govern eligibility for the three primary tax benefits for families with children – the dependent exemption, the Child Tax Credit (CTC), and the Earned Income Tax Credit (EITC). President Obama’s recent executive action will allow some parents of U.S. citizens or lawful permanent residents who have been in the country for at least five years to apply for limited work authorization. His initiative will not affect the dependent exemption or CTC but it will increase the number of parents who meet the citizenship and residency requirements for the EITC.
As background, the IRS doesn’t care what your legal status is—if you work in the United States and meet minimum income standards, you are legally required to file a tax return. To facilitate filing, the IRS assigns an Individual Taxpayer Identification Number (ITIN) to anyone who is not eligible to obtain a Social Security Number (SSN).
The dependent exemption has the most liberal eligibility requirements. If you have an ITIN and are the parent of a U.S. citizen child who lives with you in the U.S., Mexico, or Canada, your child qualifies. The same tests apply to the CTC (including the Additional Child Tax Credit—ACTC—which is the refundable portion of the CTC), except both parent and child must live in the U.S. EITC rules are most restrictive: The taxpayer and child must live in the U.S. and the taxpayer must have a Social Security number valid for work.
The Treasury Inspector General of Tax Administration (TIGTA) has insisted that children should meet the stricter EITC requirements to qualify for the ACTC. But that’s not how the IRS has interpreted the statute. Congress has routinely failed to pass legislation aimed at requiring SSNs to claim the ACTC (including in the most recent Congress).
It is unclear how many people granted work permits under the recent executive action will qualify for the EITC. But keep in mind that lawmakers of both parties often praise the EITC for encouraging work and reducing poverty. In addition, it usually serves as only a short-term benefit for recipients. The EITC, in conjunction with the CTC and the dependent exemption that these immigrants can already receive, can provide an important source of support for low-income families – but the executive action isn’t the major policy shift the critics claim it to be.
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