Immigrants must understand their U.S. immigration tax obligations to remain compliant and take advantage of potential benefits. The Internal Revenue Service (IRS) requires all income earners to file taxes if they meet certain income thresholds. Regardless of immigration status.
Many immigrants fear that paying taxes without legal status could put them at risk, but the reality is quite the opposite. Filing taxes can build a record of responsible residency, and strengthen applications for green cards or citizenship. It also provides access to tax credits that benefit families. A Queens Immigration Attorney helps you understand and fulfill your financial obligations.
Meeting U.S. Immigration Tax Obligations Without a Social Security Number
Many undocumented immigrants believe they cannot meet their U.S. immigration tax obligations without a Social Security Number (SSN). However, this is a misconception. The IRS provides an alternative: The Individual Taxpayer Identification Number (ITIN). This allows undocumented immigrants to comply with tax laws even if they do not have legal status. According to IRS data, millions of undocumented immigrants contribute billions in tax revenue each year despite lacking SSNs.
Obtaining an ITIN
Undocumented immigrants must apply for an ITIN by submitting Form W-7 to the IRS, to legally file taxes. The application requires:
- Proof of identity (such as a valid passport or national identification card).
- Foreign status documentation (such as a visa or birth certificate).
- A completed federal tax return attached to the application (unless eligible for an exception).
Once issued, an ITIN allows individuals to file taxes, receive tax credits where applicable, and fulfill their U.S. tax obligations. However, ITINs do not provide legal immigration status or work authorization.
Filing a Tax Return with an ITIN
Undocumented immigrants can file their tax returns using Form 1040 (for U.S. residents) or Form 1040-NR (for nonresidents). The IRS does not require an SSN to report income and pay taxes, only a valid ITIN. Filing taxes with an ITIN is particularly important for those pursuing immigration benefits. Tax compliance can serve as proof of good moral character. This may be required for processes like; adjustment of status, cancellation of removal, or certain visa applications.
The Economic Impact of Undocumented Immigrants’ Tax Contributions
Despite lacking access to federal benefits, undocumented immigrants pay a substantial amount in taxes. In 2022 alone, undocumented households contributed:
- $75.6 billion in total taxes.
- $46.6 billion in federal taxes.
- $29 billion in state and local taxes.
These contributions help fund Social Security, Medicare, and local infrastructure. Even though undocumented immigrants cannot access many of these services. The Social Security Administration estimates that undocumented workers contribute approximately $12 billion annually to Social Security. However, but are ineligible for benefits.
Immigrants fuel economic growth in ways you might not expect. Read more about their contributions here.
Benefits of Filing Taxes with an ITIN
Filing taxes, even without legal status, offers several advantages:
- Proof of good moral character: A documented history of meeting U.S. immigration tax obligations strengthens applications. Whether for a green card, U.S. citizenship, or other immigration relief.
- Potential refunds for overpaid taxes: Some ITIN holders qualify for tax credits such as the Child Tax Credit (CTC). This provides financial relief for families.
- Establishing residency and financial history: Filing taxes helps provide documentation. This may be used for legal status adjustments, lease applications, and banking purposes.
Risks and Limitations
While filing taxes is beneficial, undocumented immigrants should be aware of certain limitations:
- ITINs do not grant legal status: Filing taxes does not lead to a green card or citizenship.
- No access to Social Security or Medicare: Unlike workers with an SSN, ITIN holders contribute to these programs but cannot claim benefits.
- Risk of fraud or misinformation: Undocumented immigrants should avoid predatory tax preparers. They may promise legal status through tax filing, and no such benefit exists.
How U.S. Tax Residency Status Affects Worldwide Income
The U.S. tax system classifies immigrants as either tax residents or nonresidents, a distinction that affects their U.S. immigration tax obligations. This classification determines how their income, both domestic and foreign is taxed. U.S. tax residents must report and pay taxes on worldwide income. Nonresident aliens are generally only taxed on income earned from U.S. sources. Or income effectively connected with a U.S. trade or business.
U.S. Tax Residency Rules
Immigrants are considered U.S. tax residents if they meet 1 of 2 criteria:
- Green Card Test: A green card holder is automatically classified as a U.S. tax resident. Meaning they must report all income earned globally, even if it comes from foreign employment, business ventures, or investments.
- Substantial Presence Test (SPT): A non-citizen becomes a tax resident if they have been physically present in the U.S. for:
- At least 31 days in the current year, and
- 183 days over a three-year period, calculated as: All days present in the current year. Plus 1/3 of the days from the prior year, plus 1/6 of the days from 2 years ago.
For example, if an immigrant spent 120 days per year in the U.S. for the past three years. Their total under the SPT calculation would be: (120 days in the current year) + (40 days from the previous year) + (20 days from two years ago) = 180 days. Making them a nonresident for tax purposes since they did not meet the 183-day threshold.
Taxation Rules for Nonresident Aliens
Immigrants who do not pass the Green Card Test or Substantial Presence Test are classified as nonresident aliens. They are taxed only on:
- U.S.-sourced income (e.g., wages earned in the U.S., rental income from U.S. properties, dividends from U.S. corporations).
- Effectively Connected Income (ECI): Income related to a U.S. trade or business. This income is taxed at graduated tax rates, similar to those applied to residents.
- Fixed, Determinable, Annual, or Periodic (FDAP) Income: Includes passive income like interest, royalties, pensions, and dividends. It is typically taxed at a flat 30% rate. Unless a tax treaty lowers the rate.
Worldwide Income Taxation for U.S. Tax Residents
Unlike nonresidents, U.S. tax residents (including green card holders) must report and pay taxes on all income. Regardless of where it was earned, as part of their U.S. immigration tax obligations. This includes:
- Foreign salaries and wages
- Business income from overseas
- Foreign bank interest and dividends
- Rental income from foreign properties
To avoid double taxation, U.S. tax residents may qualify for:
- Foreign Earned Income Exclusion (FEIE): Allows taxpayers to exclude up to $120,000 (as of 2023) in foreign-earned income by filing Form 2555.
- Foreign Tax Credit (FTC): Provides a dollar-for-dollar credit for income taxes paid to a foreign government.
- Tax Treaties: The U.S. has tax treaties with over 60 countries to reduce tax burdens for foreign income.
U.S. tax residency rules help immigrants avoid unexpected tax liabilities. Qualifying residents should their taxes correctly and report all worldwide income. They should use available exclusions and credits to minimize their tax burden. Conversely, nonresidents should carefully structure their income sources to maximize tax treaty benefits. Avoiding unnecessary taxation. An experienced immigration attorney can provide much-needed guidance and direction.
Tax Benefits That Immigrants Often Overlook
Many immigrants in the U.S. miss out on valuable tax credits and deductions. These deductions could significantly lower their U.S. immigration tax obligations or even result in refunds. While tax laws seem complex, understanding these benefits can provide much-needed financial relief.
Child Tax Credit (CTC)
The Child Tax Credit (CTC) is one of the most beneficial tax breaks for immigrant families with children. Immigrants who file taxes with an SSN or ITIN may be eligible to receive this credit. If they meet income and residency requirements.
- In 2022, the CTC was worth up to $2,000 per child. With up to $1,600 refundable through the Additional Child Tax Credit (ACTC).
- Even if an immigrant parent files taxes using an ITIN. They may claim the credit for children who have an SSN and meet residency requirements.
- Households with low-to-moderate incomes can receive a larger portion of the credit as a refund. Reducing their overall tax burden.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is designed to support low-income workers. However, many eligible immigrants fail to claim it because they are unaware of the requirements.
- Only filers with a valid SSN (for the taxpayer and any claimed dependents) are eligible.
- The EITC reduces tax liability but can result in substantial refunds. Making it one of the most important tax benefits for working-class immigrants.
Education Credits
Immigrants pursuing higher education or supporting dependents in school can take advantage of education-related tax credits. This is a key part of U.S. immigration tax obligations. They help offset tuition costs.
- The American Opportunity Tax Credit (AOTC) allows eligible students (or parents) to claim up to $2,500 per student per year. For the first 4 years of higher education.
- At least 40% of the AOTC (up to $1,000) is refundable. Meaning that even if a taxpayer owes no taxes, they may receive a refund.
- The Lifetime Learning Credit (LLC) provides up to $2,000 per return for tuition and education-related expenses. Though it is non-refundable.
Foreign Tax Credit
The Foreign Tax Credit (FTC) prevents double taxation, for immigrants earning income both in the U.S. and abroad. This is particularly relevant for green card holders and visa workers with financial ties outside the U.S.
- The FTC allows taxpayers to claim a credit for taxes paid to foreign governments, reducing U.S. tax liability.
- It applies to wages, dividends, interest, and business profits earned in another country.
- Taxpayers must file Form 1116 to claim the credit or elect to take a deduction instead.
Additional Overlooked Tax Benefits for Immigrants
- State and Local Tax Deductions (SALT): For immigrants who own homes or pay state/local taxes. They may be able to deduct these amounts from their federal tax liability, reducing what they owe.
- Saver’s Credit: Low- to moderate-income immigrants contributing to retirement accounts (401k, IRA). They may qualify for a credit worth up to $1,000 ($2,000 for married filers).
- Deductions for Foreign Earned Income: Some immigrants working overseas or earning foreign income may exclude up to $112,000 from U.S. taxation through Form 2555.
How to Maximize These Benefits?
Many immigrants miss out on these opportunities because they don’t know they qualify. Or don’t fully understand their U.S. immigration tax obligations. They may also fear making mistakes on their tax returns.
To ensure compliance while maximizing deductions:
- Consult a Qualified Tax Attorney: Immigration status can impact tax benefits. A Queens immigration attorney with tax expertise can help handle complex rules and avoid costly errors.
- Use Free Tax Assistance Services: The IRS Volunteer Income Tax Assistance (VITA) program provides free help for low-income and immigrant taxpayers.
- File Taxes Even Without Legal Status: Undocumented immigrants paying taxes with an ITIN establish proof of residency and financial responsibility. This benefits future immigration applications.
Get Help with Taxes and Immigration
Filing taxes is about taking control of your financial future and strengthening your place in the U.S. Every tax return you file adds to a record that demonstrates your commitment to being a responsible resident. As you meet your U.S. immigration tax obligations, you positively impact your green card or citizenship applications.
At Queens Immigration Attorney, we ensure your tax filings align with your long-term immigration goals. Don’t wait to speak with a knowledgeable immigration attorney, book a free consultation now!
