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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.”
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).
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!)
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.
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.