The PATH Act, which the House has already passed and the Senate will consider, along with the omnibus appropriations for FY 2016, would make many existing tax breaks permanent, including the Earned Income Tax Credit (EITC), and the Child Tax Credit (CTC). Importantly, the legislation would alter eligibility requirements for some immigrants.
The EITC is a refundable tax credit that supports low-income workers. The size of the credit varies based on income, marital status, and number of dependents; the maximum credit amount is $6,242 for workers with three or more children. One must have a valid Social Security number to claim the credit. The CTC provides tax relief for working families by offering a $1,000 tax credit per child, a portion of which is refundable based on a formula that takes into account the family’s earned income. Under current law, the credit is available to individuals, including unauthorized immigrants filing with an individual taxpayer identification number (ITIN), who have a “qualifying child” who is a U.S. citizen or permanent resident.
The proposed bill would make permanent several reforms that made the EITC and CTC temporarily more generous under the American Recovery and Reinvestment Act (ARRA) of 2009. Specifically, the ARRA increased the EITC for individuals with three or more children, and increased the credit’s phase-out range by $5,000 for married couples who file jointly. Regarding the CTC, the ARRA made more generous the formula that guides what portion of the credit individuals can receive in their tax refund.
Another major change in the proposed legislation is an effort to clamp down on overpayments, which have been a recurring problem under the EITC and CTC. Overpayments occur when ineligible individuals receive these credits; according to the Treasury Department, 24 percent of EITC payments—or $14.5 billion—were paid in error in 2013. The proposed legislation would work to reduce overpayments in a number of ways:
- Review time. IRS would be provided additional time to review refund claims made under the EITC and CTC—to weed out improper payments and reduce fraud.
- Retroactive claims. The proposals would no longer allow individuals to claim the EITC and CTC retroactively for any prior year in which the individual did not have a valid Social Security number (or ITIN, in the case of the CTC). Under current law, all workers with valid Social Security numbers—including recent recipients—can file an amended tax return (or newly file if they failed to in previous years) and claim the CTC and EITC for up to three previous years.
- ITIN requirements. The proposed legislation would amend the system of issuing ITINs. By 2020, the Treasury Department would be required to adopt a system in which individuals have to file for an ITIN in person. Furthermore, individuals who were granted ITINs prior to 2013 will be required to renew them between 2017 and 2020. If an individual fails to pay taxes for three years, their ITIN will expire.
Impact on Immigrants
Some of the changes will alter eligibility requirements for some immigrants. New and future recipients of deferred action through the Deferred Action for Childhood Arrivals (DACA), Deferred Action for Parents of Americans (DAPA), or other similar programs receive Social Security numbers and are eligible to claim the EITC. Under the new proposal, these new holders of Social Security numbers would be ineligible to claim the retroactive EITC credits that other workers will still be eligible to claim. Unauthorized immigrant parents of CTC qualifying children would also be ineligible to claim retroactive credits if they had only recently received an ITIN.
New proposals to amend the system of issuing ITINs or requiring renewals are also seen as potential barriers to individuals that do not qualify for a Social Security number but currently file tax returns with ITINs. These individuals often include nonresident aliens who are required to file a U.S. tax return and unauthorized immigrants who pay taxes.
These provisions are forecasted to generate savings, as the Joint Committee on Taxation projects that they will bring forth $4.5 billion in savings over a 10-year window.1 However, immigrants also generate billions of dollars per year in tax revenue, often through filing with ITINs. The Congressional Budget Office estimates that “between 50 and 75 percent of unauthorized immigrants pay federal, state, and local taxes.” The Social Security Administration also estimated that unauthorized immigrants contributed about $13 billion in payroll taxes in 2010 alone. As such, the aggregate budgetary effects of these provisions ultimately remain unclear.
1 The 4.5 billion figure includes savings from preventing retroactive claiming of the EITC and CTC, as well as the new ITIN requirements.