Tax Treatment of Undocumented Immigrants in California
By Gi Jung Nam & Ellen Swain1
Are undocumented immigrants required to pay taxes and how do they pay taxes? This is a question worth answering to correct misconceptions and to understand how undocumented immigrants comply with the tax laws. Undocumented immigrants are individuals who reside in the U.S. without government documentation showing that they are authorized to reside or stay in the United States (i.e., entered the U.S. without legal documentation or staying with an expired temporary visa.)2 According to the Center for Migration Studies, California was home to around 2.3 million undocumented immigrants in 2018.3 New American Economy, a bipartisan research and advocacy organization, reported using data for the 2018 year that undocumented immigrants paid a total of approximately $7 billion in taxes: $4.5 billion of federal taxes and $2.25 billion of state and local taxes.4
As discussed below, the current law requires undocumented immigrants to pay federal and state income taxes despite receiving fewer tax credits and benefits than other residents with a social security number (SSN). Undocumented immigrants are required to pay taxes because residency for federal and state income tax purposes generally does not consider the immigration status of the individual. The Internal Revenue Service (“IRS”) issues an Individual Taxpayer Identification Number (“ITIN”) to undocumented immigrants upon filing of an application and supporting documents. Both the IRS and the Franchise Tax Board (“FTB”) allow undocumented immigrants to use the ITIN to file and pay their taxes.
a. Federal Residency Status for Income Tax Purposes
For federal income tax purposes, the Internal Revenue Code (“IRC”) provides that an alien (an individual who is neither a citizen nor national of the U.S.) is classified as a resident alien if the individual meets either: 1) the lawful permanent resident test, or 2) the substantial presence test.5 The lawful permanent resident test classifies aliens who are lawful permanent residents or “green card holders” of the U.S. at any time during the calendar year as resident aliens.6 Undocumented immigrants do not have legal presence in the U.S. and by definition do not satisfy the lawful permanent resident test. Undocumented immigrants are classified as resident aliens by meeting the substantial presence test.7 An individual meets the substantial presence test if she is physically present in the U.S. for at least 31 days during the current year, and at least 183 days during the current year and prior two years combined including: (1) all the days present in the current year, one-third of the days present in the first year before the current year, and one-sixth of the days present in the second year before the current year.8 Undocumented immigrants are classified as resident aliens under this test because many of them are physically present in the U.S. for the required amount of days. As resident aliens for federal income tax purposes, undocumented immigrants are generally taxed the same way U.S. citizens are taxed.9
b. State Residency Status for Income Tax Purposes
For California state income tax purposes, Revenue and Taxation Code ("RTC") provides that every individual subject to tax under the California Personal Income Tax Law must make a return specifically stating items of gross income received from all sources and the deductions and credits allowable.10 California's residency law does not consider an individual's immigration status to determine residency.11 Rather, the RTC provides that a resident is any individual who is either in California for other than temporary or transitory purposes or domiciled in California, but who is outside California for temporary and transitory purposes.12 Therefore, undocumented immigrants physically present in California are considered residents and are taxed in the same way as any other resident of California.
To file a federal income tax return,an individual must furnish an identifying number on the tax return.13 An identifying number may be an SSN or an ITIN issued by the IRS.14 Generally, only citizens and individuals who are legally authorized to work in the U.S. are eligible to receive an SSN.15 Individuals who are not eligible for the SSN may apply for the ITIN.16 The IRS states on its website that it issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those who are not eligible for an SSN. It also specifies that an ITIN is issued regardless of immigration status, because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the IRC.17 The ITIN serves the sole purpose of federal tax reporting. Because undocumented immigrants are not eligible to receive a SSN, they have to apply for an ITIN with the IRS to file their tax return and pay taxes. The ITIN application requires them to file a form W-7 and submit original or certified copies of identifying documents such as passports or birth certificate.18
Although the IRS specifies that the ITIN is for federal tax purposes only, many states, including California, require an SSN or ITIN to file and pay state income taxes or to qualify for certain credits.19 The IRS may refuse to issue an ITIN to an individual if there is no need for the ITIN for federal income tax purposes, even if the ITIN is needed for state income tax purposes.20 In those situations, the individual is unable to file or pay state income taxes or receive certain credits or benefits that require an ITIN.
IV. Use of Identifying Numbers to Determine Credit Eligibility
The IRC generally provided larger credits or benefits to taxpayer with an SSN, and the disparity became greater after the Tax Cuts and Jobs Act ("TCJA"). Effective for taxable years 2018 through 2025, the TCJA changed the federal personal and dependent exemption deduction amounts to $0, effectively eliminating it.21 In addition, TCJA increased the federal child tax credit (CTC) from $1,000 per child to $2,000 per child, up to $1,400 of which is refundable, and requires a qualifying child to possess a valid SSN to receive the full benefits of the CTC.22 Prior to enactment of TCJA, federal law also allowed an ITIN to be used to claim the CTC.23 TCJA also created a new, nonrefundable credit up to $500 per each qualifying dependent other than children who could not be claimed for CTC (also known as Credit for Other Dependents or Family Tax Credit).24 Qualifying dependents, who are citizens, national or resident aliens qualify for the $500 Credit for Other Dependents, and TCJA explicitly excluded dependent aliens who are nonresident aliens.25 Thus, after TCJA, parents who are undocumented immigrants are eligible to receive a fraction of what parents with SSN are eligible to receive.
In California, AB 1876 (2019-2020 Regular Session) was chaptered in 2020 to further expand access to the California Earned Income Tax Credits ("EITC") and Young Child Tax Credit to ITIN filers, which includes undocumented immigrants. After signing the bill, Governor Gavin Newsom indicated that expanding access to California EITC will bolster immigrant families facing Covid-19 induced recession and boost economic growth.26 Prior to AB 1876, undocumented immigrants were not eligible to receive those credits in California and remain ineligible to receive the EITC at the federal level.27
Undocumented immigrants are required to pay federal and state income taxes and data shows that billions of tax dollars have been received from ITIN filers.28 Undocumented immigrants have filed and paid taxes despite having been eligible for less credits. In part, they may have been motivated to file and pay taxes to later use it as evidence of good moral character to become legal residents or to use as one of the supporting documentations to suspend deportation.29 Undocumented immigrants may also be motivated to pay taxes to avoid penalties and interest and to be law abiding residents. In California, AB 1876 created a more equal tax system between ITIN and SSN filers, and it may increase the tax compliance of undocumented immigrants even more.
Endnotes: 1. This paper was written by Gi Jung Nam and Ellen Swain as members of the Taxation Section of the California Lawyers Association for the California Tax Lawyer publication. The content contained in this paper are the individual views of the authors and do not represent the position or views of the California Lawyers Association or their employers. Please direct all questions or comments to Gi Jung Nam at email@example.com. The authors thank the California Lawyers Association’s Tax Policy, Practice and Legislation Committee for the opportunity to publish this paper. 2. See Stephen Goss, Effects of Unauthorized Immigration on the Actuarial Status of the Social Security Trust Funds (Social Security Administration Office of Chief Actuary, Apr. 2013), p. 1. 3. Center for Migration Studies, State-Level Unauthorized Population and Eligible-to-Naturalize Estimates, http://data.cmsny.org/. 4. New American Economy, Map the Impact, https://www.newamericaneconomy.org/locations/california/. 5. IRC § 7701(b)(1)(A); see also IRC § 7701(b)(1)(A)(iii) (an alien may also be classified as a resident alien if the individual makes a first year election.). 6. IRC § 7701(b)(1)(A)(i). 7. IRC § 7701(b)(1)(A)(ii). 8. Id.; IRC § 7701(b)(3)); see also IRS Substantial Presence Test Webpage, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test. 9. IRC §§ 1, 61. 10. RTC § 18501. 11. RTC § 17014(a). 12. Ibid. 13. IRC § 6109(a). 14. IRC § 6109(d), (i). 15. See Social Security Administration, Social Security Numbers for Noncitizens (Mar. 2018) available at https://www.ssa.gov/pubs/EN-05-10096.pdf. 16. IRC § 6109(i); Treas. Reg. § 301.6109-1(a)(1)(ii)(B). 17. See IRS, Individual Taxpayer Identification Number webpage available at https://www.irs.gov/individuals/individual-taxpayer-identification-number. 18. IRS, Instructions for Form W-7 (09/2020) available at https://www.irs.gov/instructions/iw7#idm140607243910272. 19. RTC § 18624. 20. See AB 2247 (2019-2020 Regular Session) (a taxpayer may provide alternative identifying information, in the form and manner prescribed by the Franchise Tax Board, of a dependent who is included on a tax return claiming the exemption credit if that dependent is ineligible for the federal tax identification number.) 21. Pub.L. No. 115-97 (Dec. 22, 2017); IRC § 151(d)(5). 22. IRC § 24(h)(2), (5), (7). 23. IRC § 24(e). 24. IRC § 24(h)(4). 25. IRC § 24(h)(4)(B) 26. Office of Governor Gavin Newsom, Governor Newsom Takes Action on Legislation to Support California’s Immigrant and Refugee Communities (Sep. 27, 2020) available at https://www.gov.ca.gov/2020/09/27/governor-newsom-takes-action-on-legislation-to-support-californias-immigrant-and-refugee-communities/. 27. IRS, Social Security Numbers and Claiming the EITC (Updated Jul. 31, 2020) available at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/social-security-numbers-and-claiming-the-eitc. 28. See New American Economy, Map the Impact, supra; IRS, Tax Forum Presentation Slide (2014) available at https://www.irs.gov/pub/irs-utl/20-Immigration%20and%20Taxation.pdf. 29. U.S. Department of Justice, Application for Suspension of Deportation available at https://www.justice.gov/sites/default/files/pages/attachments/2015/07/24/eoir40.pdf; Catherine E. Shoichet, Undocumented immigrants are paying their taxes today, too (CNN, Apr. 15, 2019) available at https://www.cnn.com/2019/04/15/us/taxes-undocumented-immigrants/index.html.