The new tax reform legislation will not only have a major impact on U.S. citizens and green card holders, but it will also affect some temporary visa holders and undocumented immigrants.
Congress should address immigration reform on its own merits, rather than looking to the tax code to fix the symptoms of a broken immigration system.
Regarding its effects on immigrants, the final package will adopt the proposals that were originally in the Senate bill. As we indicated in our previous blog, this version was less-austere than the House bill. However, the final bill would still revoke eligibility for the Child Tax Credit (CTC) among families with undocumented children, and will increase the taxable income of some immigrants and visa holders by eliminating personal exemptions.
1) The Child Tax Credit
The CTC is a progressive tax credit that supports working families. It allows taxpayers to claim $1,000 for each child under the age of 17, with the benefit phasing out among higher-income earners. The phaseout begins for individuals with an adjusted gross income (AGI) of $75,000 and for couples with an AGI of $110,000. The CTC is also partially refundable, meaning that families can receive a portion of the credit even if they have no federal tax liability. The CTC is credited with preventing over a million children from entering poverty each year, and BPC recently released a report recommending several changes to the credit.
Importantly, workers do not need a Social Security Number (SSN) to claim the CTC, meaning tax filers can receive it provided they have an Individual Taxpayer Identification Number (ITIN). ITINs allow individuals without an SSN–such as some temporary visa holders and many undocumented immigrants–to file and pay taxes on their income. In 2010, over $870 million in income taxes were collected from ITIN filers.
The tax reform legislation will increase the maximum size of the CTC to $2,000. However, ITIN filers will now only qualify for the refundable portion of the CTC if their dependents have valid SSNs. As such, undocumented immigrants with U.S. citizen children will be able to continue utilizing this benefit, while those with undocumented children will not.
While this change is less-austere than the House’s original proposal—which would have revoked CTC eligibility among undocumented filers with U.S. citizen children—it will still likely increase financial insecurity, as around a third of children living in poverty are children of immigrants.
In addition, several other immigration-related provisions in the original House proposal—namely tightening eligibility requirements for tax credits designed to defray college costs and subsidize low-wage workers—were not included in the final package.
2) Eliminating Personal Exemptions
The final tax reform package will make another set of changes that were present in both the House and Senate versions of the bill—namely the elimination of personal exemptions and doubling of the standard deduction.
Personal exemptions allow taxpayers to reduce their taxable income by the number of individuals they claim on their tax return. Each exemption is worth $4,050 for tax year 2017, and like the CTC, it phases out among high-income earners. The phaseout begins at $261,500 AGI for single filers and $313,800 AGI for married couples filing jointly.
Similarly, the standard deduction reduces a taxpayer’s taxable income, but by a uniform amount: $6,350 for single filers and $12,700 for married filers filing jointly in 2017. Taking the standard deduction is an option for taxpayers who choose not to itemize other available deductions such as for mortgage interest, state and local taxes, or certain medical expenses. Currently, taxpayers can claim both the standard deduction and personal exemptions.
The final tax package will eliminate personal exemptions, while increasing the standard deduction to $12,000 for single filers and $24,000 for married joint filers. This change will adversely affect “nonresident aliens”—namely temporary visa holders who have spent most of their time out of the country over the past three years, as well as undocumented immigrants who may have arrived more recently. Nonresident aliens are not eligible for the standard deduction, but can currently (in most cases) claim one personal exemption. As such, eliminating personal exemptions will lead to an increase in their taxable income–and therefore their taxes payable. For more details on this provision, refer to our previous blog.
The Bottom Line
Though the bill will likely hike taxes for many immigrant families, it is a positive development that several of most austere tax provisions in the House bill were left out of the final package. Ultimately, Congress should address immigration reform on its own merits, rather than looking to the tax code to fix the symptoms of a broken immigration system.