Tax reform is abuzz in Washington, D.C. With both chambers of Congress passing legislation to overhaul the U.S. tax code, it now moves to the conference committee. If codified into law, tax reform would have a major impact on U.S. citizens and green card holders, but several noteworthy provisions would also affect temporary visa holders and undocumented immigrants. This legislation would change eligibility for several tax credits, namely the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), and American Opportunity Tax Credit (OATC). In addition, the proposal would increase the taxable income of some immigrants and visa holders by eliminating personal exemptions.
1) Tax Credits
Currently, there are several tax credits available for certain immigrants. The most notable is the CTC, which 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 the Bipartisan Policy Center recently released a report recommending several changes to the credit.
A second credit affecting nonresidents is the AOTC, which provides college students with a maximum credit of $2,500 for tuition and related expenses. Like the CTC, this credit is also partially refundable.
Importantly, workers do not need a Social Security Number (SSN) to claim these credits, meaning immigrants can receive the CTC and AOTC, 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.
Both pieces of legislation would increase the maximum size of the credit, to $1,600 in the House bill and $2,000 in the Senate version, though this comes with an important caveat. Specifically, the House bill would require filers to have an SSN to qualify for the refundable portion of the CTC, which means that undocumented immigrant, even those with dependents who are U.S. citizens, would no longer receive the benefit if they have no tax liability. Under the Senate version, ITIN filers would still qualify for the refundable portion of the CTC, provided their dependents have valid SSNs. This would allow undocumented immigrants with U.S. citizen children to continue utilizing this benefit, while individuals with undocumented children could not.
These changes would likely increase financial insecurity among immigrant families with child dependents, albeit more severely under the House proposal. Around a third of children living in poverty are children of immigrants, and over 4 million U.S. citizen children live with a parent who is undocumented.
The House proposal would similarly change the AOTC by requiring students have an SSN to claim the refundable portion of the credit. This would disproportionately affect recipients of President Obama’s 2012 Executive Order on Deferred Action for Childhood Arrivals (DACA) and other DREAMers, many of whom have attended college or post-secondary school while working. The Senate bill would not make this change.
The House bill would make another notable immigration-related change affecting not only the CTC and AOTC, but the EITC as well. The EITC is a refundable tax credit that provides income support for low- and moderate-income workers. Unlike the AOTC and CTC, filers are required to have an SSN in order to claim the EITC. This arrangement would be altered under the House bill, but not the Senate bill, by requiring filers to provide “work-eligible SSNs” to claim the refundable portions of the CTC, AOTC, and EITC. If enacted, this change would preclude DACA recipients from receiving these benefits. The DACA program allowed recipients to obtain work authorization documents from the government, including SSNs, which have been used to claim these tax credits. Under the House proposal, the SSNs of DACA recipients would not be considered “work-eligible,” and the Internal Revenue Service (IRS) would be given the authority to alter ineligible tax returns to deny the refundable credits.
Congress should address immigration reform legislation on its own merits, rather than looking to the tax code to fix the symptoms of a broken immigration system.
2) Eliminating Personal Exemptions
Changes to the personal exemptions may impact some foreign nationals who file taxes in the United States. 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.
The number of exemptions that non-citizen, foreign-born taxpayers may claim depends on whether they are considered a resident or nonresident under the Internal Revenue Code; this may differ from their status under the Immigration and Naturalization Act. According to the IRS, a nonresident alien is a non-citizen who does not have a green card and has spent a substantial amount of time outside the United States over the past three years. A resident alien, on the other hand, has either a green card or spent a substantial amount of time inside the United States over the past three years. Thus, for undocumented immigrants and temporary visa holders, their tax classification as resident or nonresident alien is determined by how much time they have spent inside the United States, and not their immigration status.
The vast majority of nonresident aliens are not allowed to claim personal exemptions for their dependents, and thus may only claim themselves. However, filers may claim a personal exemption for their nonresident alien spouse, provided the spouse had no gross income in the given year.
For example, a native-born middle-class married couple with two children filing jointly may claim four exemptions on their tax return, one each for the tax filer, spouse, and dependents, reducing their family’s taxable income by $16,200. Conversely, a married nonresident alien couple with two children may only claim themselves, meaning that each spouse can reduce their respective taxable income by just $4,050.
Like personal exemptions, 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. However, only U.S. citizens and resident aliens qualify for the standard deduction, while nonresident aliens are ineligible.
The proposed tax legislation would eliminate personal exemptions for all taxpayers. This tax increase would be mitigated for many U.S. citizens and resident aliens, as the legislation would also increase the standard deduction to $12,000 for single filers and $24,000 for married filers filing jointly. However, nonresident aliens, already ineligible for the standard deduction, would likely see their taxable income, and therefore their taxes payable, rise, without the personal exemption. This would most impact temporary visa holders who have not spent enough time in the United States in the last three years to meet the tax residency requirements, as well as undocumented immigrants who may have arrived more recently. The majority of undocumented immigrants in the United States are estimated to have been in the country more than ten years.
The Bottom Line
As lawmakers continue to debate tax reform, it is important for stakeholders and the general public to understand the distributive effects of the legislation. Both the House and Senate bills would likely increase the tax burden among nonresident aliens and undocumented immigrants. Some believe eliminating the CTC and AOTC for undocumented immigrants will encourage them to leave the United States. However, many of these immigrants grew up here or have children who are U.S. citizens eligible for the tax credits. As an immigration enforcement tool, the tax code is a blunt instrument. It is unlikely to significantly impact the overall undocumented population and could cost the U.S. government tax revenue in the long run, if those paying taxes no longer see an advantage in doing so. Congress should address immigration reform legislation on its own merits, rather than looking to the tax code to fix the symptoms of a broken immigration system.