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Tax ID Number 2

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YEOW!  It’s been a month since the last article – how did that happen?  Mea maxima culpa!

DOUBLE YEOW! – That last article stirred up a hornets’ nest’s worth of inquiries, discussions, and other voracious animals intent on consuming all of my spare time.  It also led to acquiring some new, paying clients.  I’ll mimic a wise old gent’s response to the question “How are you doing?” with “Can’t complain – no one listens if I do.”

How to Move to the Philippines Manual

Almost all of the foo-foo-rah revolved around the topic of Individual Taxpayer Identification Numbers or ITINs.  I can’t say whether recent U.S. tax reforms have served to stimulate concerns on this topic.

I can understand how a U.S. expat, married to a “U.S .Nonresident Alien” spouse, who filed U.S. income tax returns using the “Married Filing Separate (MFS)” filing status in the past with the 2017 standard deduction of $6,350 and who is comparing 2018’s MFS standard deduction of $12,000 to the $24,000 available to “Married Filing Jointly (MFJ)” filers, might be interested in having the spouse obtain an ITIN so they can file a joint tax return.

So, let’s talk ITINs – specifically the rules of eligibility to obtain an ITIN (a not well understood subject by most taxpayers).

ITIN ELIGIBILITY

In its simplest form, eligibility to obtain an ITIN is based on two issues:  1) a person has a legitimate need for an ITIN; and 2) that person is not eligible to possess a U.S. Social Security Account Number (SSAN).

The second issue is quite straightforward – either one is eligible or is ineligible to possess a U.S. SSAN.  Those who are eligible include U.S. citizens, U.S. nationals, and U.S. Resident Aliens (i.e., “Green Card” holders).  With an extremely small exception, all others are ineligible for a U.S. SSAN.

The first issue is where confusion, misinformation, personal interpretations, and “feelings” all come together to wreak havoc amongst the taxpaying public.  Again, in simple terms, a “legitimate need” means that a person needs an ITIN to interact with the U.S. Internal Revenue Service (IRS).

This interaction includes, but is not limited to:

  • Being required to file a U.S. income tax return;
  • Claiming the benefits of an income tax treaty that’s in force between the U.S. and a “foreign” country;
  • Having U.S. income taxes withheld from taxable income being received from a source within the U.S.;
  • Obtaining a refund of excess U.S. income tax withholding; and
  • Serving as a means to identify the ITIN holder to the IRS by a third-party source of U.S. income tax information.

(Did I say, “simple”?  No such thing, when it comes to taxes!)

EXPAT-RELATED ITEMS

In general, the ITIN concerns shared by expats revolve around the members of their families who are U.S. Nonresident Aliens – spouses, children, and other “family members” for whom financial support is provided.  Each one of these family members falls under separate rules when it comes to eligibility for obtaining an ITIN.  In keeping with “the theme of simplicity,” here’s how those rules break out, starting with the easiest and going to the complex:

Other Family Members – A U.S. Nonresident Alien, who is considered to be a “family member” for whom financial support is provided but is not a spouse or a child of the U.S. taxpayer expat AND who does not physically reside within the U.S. is not eligible to obtain an ITIN.  Period.

Spouses – Generally, a U.S. Nonresident Alien spouse of the U.S. taxpayer expat is eligible to obtain an ITIN, provided that the reason for obtaining an ITIN is based on the U.S. taxpayer expat AND the U.S. Nonresident Alien spouse “electing” to file joint U.S. income tax returns.  By doing so, the spouse with the ITIN is considered to be a U.S. Resident Alien for U.S. income tax purposes only.  The ITIN does not provide any other benefits or authorizations to those who possess it – the ITIN is solely for U.S. income tax purposes.

Note:  A U.S. Nonresident Alien spouse may be eligible to obtain an ITIN on his/her own accord, based on a specific, legitimate need; as mentioned above. 

Children – Ah, the source of great pride and, on occasion, problem:  children.  The eligibility of U.S. Nonresident Alien children for obtaining an ITIN is the largest source of consternation and misconception (sorry if there’s a pun in there somewhere) amongst U.S. taxpayer expats.  Generally, a U.S. Nonresident Alien child, who does not physically reside in the U.S., Mexico, or Canada, is not eligible to obtain an ITIN. There are exceptions, however, and this is where the “foo” hits the fan.

Two of the major exceptions are:

1.  A U.S. Nonresident Alien child of a U.S. taxpayer serving in the U.S. Armed Forces assigned to a location outside of the U.S. is eligible to obtain an ITIN.  Care must be taken when interpreting this statement.

  • The U.S. taxpayer must be serving on active duty in one of the branches of the U.S. Armed Forces.  “Serving” with other U.S. Government agencies does not count.
  • The U.S. taxpayer member of the U.S. Armed Forces must be assigned to a location outside of the U.S.  Being assigned to a post, station, or home port within the U.S. does not count, nor does the temporary assignment to duty away from the U.S. post, station, or home port.
  • The U.S. Nonresident Alien child must be the physical offspring or the legally adopted child of the U.S. taxpayer.  “Hanai” (informally adopted) children and other children, for whom support is provided but whose adoption by the U.S. taxpayer is not recognized by a government agency, do not count.

2.  A U.S. Nonresident Alien child of a U.S. citizen or national who meets the “Qualified Dependent Child” tests for U.S. income tax purposes, as described in the U.S. Internal Revenue Code.

  • The U.S. taxpayer must be a U.S. citizen or a U.S. national.
  • The U.S. Nonresident Alien child cannot be eligible to be claimed as a dependent on any other person’s U.S. income tax return.
  • The U.S. Nonresident Alien child cannot file a joint U.S. tax return with his/her own spouse (with a single exception).
  • The U.S. Nonresident Alien child must be legally adopted (as described above) by the U.S. taxpayer and must have lived with the U.S. taxpayer for the entire tax year.
  • The U.S. Nonresident Alien child must be younger than the U.S. taxpayer (and the U.S. taxpayer’s MFJ spouse), and be under the age of 19 at the end of the tax year, or under the age of 24 at the end of the tax year if a full-time student for any part of five calendar months during the tax year, or any age if permanently and totally disabled.
  • The U.S. Nonresident Alien child cannot have provided over 50% of his/her own support during the tax year.

Note:  Similar to a U.S. Nonresident Alien spouse, a U.S. Nonresident Alien child may be eligible to obtain an ITIN on his/her own accord, based on a specific, legitimate need; as mentioned above. 

SUMMARY

As you can see, the rules and their exceptions can be overwhelming and confusing.  They also lead to feisty conversations and arguments on various social media platforms.  Far too many rejected ITIN applications can trace the root cause of their rejection to a post, comment, or anecdote expressed by someone who “knows the ropes” and relays their memories of personal experiences.

The ITIN application process, however, isn’t that difficult.  Sticking to the rules and instructions provided by the IRS – without any “personal interpretation wiggle room” – and insuring that an applicant “dots all of the ‘Is’ and crosses all of the ‘Ts’ on the application” will lead to the successful issuance of an ITIN.

 

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PaulK

Paul is a CPA and a retired tax accountant, having served companies and corporations of all sizes, as well as individuals, in public accounting practices. Prior to what he refers to as his "real job," he served a 24-year career in the U.S. Navy, retiring as a Master Chief Petty Officer. It was during this career that he met and married his OFW spouse of 40+ years, Emy, while stationed in London, UK. (Though he pleaded for the assignment, Paul never received orders to the Philippines.) A "Phil-phile" from an early age, Paul remembers his first introduction to the Philippines in the primary grades of a parochial elementary school where, one week each year, children donated their pennies to purchase school supplies, food and other necessities for Filipino children in need. That love for Filipinos continues to this day. Calling Pasuquin, Ilocos Norte--in the far northwestern part of Luzon--home (just about as far away from Davao as one can be while still being on one of the major islands) Paul prefers a more relaxed provincial life style, and willingly shares a different view of the Philippines from "up north"!

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Ed Hew
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Thanks but forgive my confusion. Just how exactly does this apply to a NON-US-citizen with zero US taxable income and zero Philippine income of note but needing a Philippine Tax-ID-Number (TIN) for reasons you seem to mention? (Note that people are taxed and tax is auto-withheld by their nationality unrelated to either USA or Philippines.)

Paul
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This article was about the U.S. IRS’ Individual Taxpayer Identification Number (ITIN). It does not address a Philippine (BIR) Tax ID Number, nor does it address any tax-related issues regarding countries other than the U.S. With regard to tax that is “auto-withheld” (e.g., Philippine income tax withheld by a bank on the taxable interest income generated by a bank account), a U.S. taxpayer may have relief from “double-taxation” by means of a Foreign Tax Credit (FTC) that can be applied directly against the taxpayer’s income tax liability. The FTC is available courtesy of the income tax treaty in force between… Read more »

Peter Bell
Guest

Paul, I’m not American and, therefore, not familiar with American tax matters. However, reading through your article, I suspect that there is a logical error in your statement about ITIN eligibility.

If the statement about eligibility for SSAN is correct, almost all Americans are eligible for SSAN. So, looking at your statement about ITIN eligibility item 2, I conclude that almost all Americans would be eligible for SSAN and, therefore, not be eligible for ITIN. I suspect that the error lies in the ‘AND’ between the two conditions which should be ‘OR’.

Paul
Guest

Hi Peter – The logic holds valid. The ITIN is for U.S. Nonresident Aliens (i.e., citizens and nationals of countries other than the U.S. who reside in locations outside of the U.S.). Your observation about who is eligible for a U.S. SSAN is mostly correct. Not all Americans are eligible – only U.S. citizens, U.S.. nationals, and U.S. resident aliens (holders of valid resident visas) plus a few exceptions are eligible for a U.S. SSAN. (“Americans” covers most everyone coming from North, Central, and South America.) The article specifically states that anyone who is eligible for a U.S. SSAN is… Read more »

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