Life has been pretty good these past few weeks, dear readers. There have been moments, however, when life takes an unexpected turn. The latest turn it has taken has me switching from my “Paul on Vacation” hat to my “Paul the Tax Accountant” hat!
It caught me by surprise, but after taking a few minutes to think things out, I can see why my “Tax Hat” is getting a bit more use. The current economic conditions in general and the upcoming implementation of some new U.S. income tax regulations in particular have taxpayers abuzz. The chatter about possible tax increases and how to legally minimize their effects has significantly increased.
CHATTER FROM EXPATS IN THE PHILIPPINES
U.S. taxpayers living in the Philippines are very much among those with questions. I’ve received a number of private e-mails from some of those taxpayers. Additionally, as a member of various Philippines-oriented chat groups and forums, I read and respond to these tax questions.
A vast majority of these questions deal with the same topic. In an effort to make sure that only the legal minimum income taxes are assessed and paid, these taxpayers are looking at their families and, in particular, whether they are claiming all of the exemptions for dependents that they are legally entitled to claim.
Handling these questions has become a labor of love for me. Taking care of those received via e-mail is rather easy. After all, not only have I been trained in these tax matters, I also have over fifteen years of experience to call on. The questions posed in the chat groups and forums, however, are a different story.
As those of you who are members of chat groups and forums know, a question posted to the group or forum will net a number of responses – some that are valid and correct, but far too many that are based on misconceptions, rumors, “SWAGs” (Scientific Wild A** Guesses), or other invalid or incorrect information. All answers are well-intentioned but, when it comes to U.S. income tax matters, they can be downright harmful.
WHAT’S THE BIG QUESTION?
Summarizing and paraphrasing, the BIG question is:
“Can I claim an exemption for my Philippine children as dependent?”
Like almost all questions dealing with the provisions of the Internal Revenue Code (IRC), the answer is a resounding, “Maybe.” Whether the answer is “Yes” or “No” depends on the circumstances surrounding the taxpayer, the taxpayer’s family situation, and family members’ citizenship and residency status, among other things.
For the most part, the U.S. taxpayers who are asking the BIG question are U.S. citizens living in the Philippines who married Philippine citizens with Philippine citizen children. They consider the children as dependents, having paid all living expenses that those children incur.
They know that to claim any exemptions, the children would need either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). They also know that an SSN can only be issued to a U.S. citizen or a U.S. resident alien (i.e., a “Green Card” holder). So, they correctly deduce that the children may need ITINs.
WHO IS ELIGIBLE FOR AN ITIN?
According to the Internal Revenue Service (IRS), the IRS “issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN.
“Additionally, examples of individuals who need ITINs include:
- A nonresident alien required to file a U.S. tax return,
- A U.S. resident alien (based on days present in the United States) filing a U.S. tax return,
- A dependent or spouse of a U.S. citizen/resident alien, and
- A dependent or spouse of a nonresident alien visa holder.”
That third example, “A dependent or spouse of a U.S. citizen/resident alien,” sounds like a lock, doesn’t it? That’s what many of those asking the BIG question think. They believe that those children are eligible for an ITIN and, with an ITIN, they can claim an exemption for their dependent children. In most cases, THEY ARE WRONG.
WHO IS A DEPENDENT?
The example above refers to being a dependent – that’s the operative word: “dependent.” The IRS has its own definition for the word, “dependent,” and it is that definition that must be used for U.S. income tax purposes.
On the surface, the definition appears simple. The IRS says that a dependent is either a “qualified child” or a “qualified relative.” There are five “tests” that must be met for someone to be deemed a “qualifying child” or a “qualifying relative.” Almost all who ask the BIG QUESTION have children who meet the five tests for being a “qualifying child.”
The major problem that arises, though, is with the actual claiming the exemption on the taxpayer’s tax return. Not all dependents can be claimed as an exemption. You can claim an exemption for a “qualifying child” or “qualifying relative” only if these three tests are met.
- Dependent taxpayer test.
- Joint return test.
- Citizen or resident test.
The Philippine citizen children of U.S. citizens living in the Philippines almost always meet the first two tests. Big problems occur with the third one – the citizen or resident test.
CITIZEN OR RESIDENT?
Here, again, is what the IRS says about this test: “You generally cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. However, there is an exception for certain adopted children.
If you are a U.S. citizen or U.S. national who has legally adopted a child who is not a U.S. citizen, U.S. resident alien, or U.S. national, this test is met if the child lived with you as a member of your household all year. This exception also applies if the child was lawfully placed with you for legal adoption.
So, finally, we are finding an answer to our BIG QUESTION. You can claim an exemption for a “qualified child” if the child is:
- A U.S. citizen,
- A U.S. resident alien,
- A U.S. national,
- A resident of Canada or Mexico,
- A child who is not a U.S. citizen, U.S. resident alien, or U.S. national but is legally adopted by a U.S. citizen or a U.S. national, who lived with the taxpayer as a member of the taxpayer’s household all year, or
- A child who is not a U.S. citizen, U.S. resident alien, or U.S. national but was legally placed in foster care with a U.S. citizen or a U.S. national, who lived with the taxpayer as a member of the taxpayer’s household all year
SUMMARY
For a U.S. taxpayer to claim an exemption for a dependent Philippine citizen child on that taxpayer’s tax return, that child must be either legally adopted by, or be legally placed in foster care with, the U.S. taxpayer. Said child would be eligible for an ITIN unless the adopted child becomes a U.S. citizen, wherein the adopted child would be eligible for a SSN.
DISCLAIMER
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.
Great info Paul! Thanks,great to see you again!
Hi Randy – Thanks for your comment. Glad to be of service. 😉
Great post Paul but now my head hurts. 🙁
I agree with Gary. Although pretty much anything involving the IRS gives me a headache. Why cant they just make it simple?
Hi Bill – Guess I have a little more tolerance for IRS headaches. Comes from plenty of beer-related headaches, I guess. 😆
Hi Gary – Thanks. Well, that’s what guys like me are for – taking your headaches and “suffering” them for you! 🙂
Hi Paul –
None of this applies to me, but just out of curiousity regarding the Philippine citizen child legally adopted by, or be legally placed in foster care with, the U.S. taxpayer, at what age would the Philippine citizen child cease to qualify for exemption? 18 or 21?
I supposed the U.S. taxpayer would be required to furnish IRS an affidavit of support for the Philippine citizen child as member of the household the previous year?
Hi John – The Philippine citizen child who is legally adopted or legally places with a U.S. citizen or national would be eligible for an exemption claim as long as they are under the age of 19.
This rule is simply a prelude to obtaining citizenship for the adopted child, wherein the child would qualify for an exemption claim under the child’s own merit. If the child obtains U.S. citizenship, then any age rules that apply to dependents would apply to that child.
A U.S. taxpayer would not be required to furnish any documentation of support to the IRS unless asked to at a later date.
Hope that makes sense. 😉
So Paul, my cat qualifies as a dependent right?
Hi Don – Sorry, but a cat doesn’t meet the IRS definitions of “individual” and “person.” Not that people haven’t tried to claim their pets as dependents in the past! 😆
If you have a child placed in your foster care can you be paid money by the U S for taking care of them ????
Hi Lenny – Being paid money for taking care of a child placed in your foster care would be the function of a state or local government agency, not the federal government.
One drawback from such an arrangement would be that too much government agency aid received for the care of that child would work against the percentage of total support paid by the taxpayer. The taxpayer is required to pay a substantial amount, if not all, of the expenses involved in supporting the child. 🙁
I was referring to like it is in the U S..They pay you for the support there…If i were to do the same here in the Philipphines would the U S pay me for supporting the child also here??
Hi Lenny – Oh, now I understand!
Generally, No. If you have a child placed in your foster care here in the Philippines, you would be ineligible for any foster care support payments from government sources in the U.S. in most instances.
The various states and local government agencies who do provide such assistance generally have stipulations that limit the geographical area in which the beneficiary must live in order to receive the assistance.
Paul,
I will be applying for an ITIN for my spouse Anne to claim her as a dependent on my tax return. I fill out the application W-7 Form, Make copy of her passport and have it authenticated at the US Embassy, send the application/copy of her authenticated passport with my next (2013) tax return to the IRS address listed in the W-7 application instruction. When applying for ITIN, tax return cannot be filed electronically the year of applying for the ITIN, but you can the following year. Can you please tell me if this is the correct way. Thanks so much
Hi PD – You’ve pretty much have the process down correctly. The only issue I see with a possibility of being problematic is the copy of Anne’s passport – it needs to be “properly certified” and not authenticated. I might be splitting hairs, but here is guidance provided by the IRS at:
http://www.irs.gov/Individuals/International-Taxpayers/Obtaining-an-ITIN-from-Abroad
The IRS will accept copies of original documents, if the copies have been properly certified by:
1.the government agency (foreign or domestic) which issued the documents, or
2.employees of the U.S. State Department located in U.S. embassies and consulates abroad.
Note: The instructions for Form W-7 only refers to #1 and does not mention #2.
It is my understanding that the U.S. Citizens Services offers notary services with the proviso that: Notarizing officers do not certify that the contents of submitted documents are true. A notarizing officer only certifies that you have signed and sworn or affirmed under oath that the contents are true. I do not know whether or not this is considered “properly certified” by the IRS. The Internal Revenue Code and U.S. Treasury Regulations are silent with regard to the definition of “properly certified.”
Some successful applicants have had a copy of the Philippine passport certified by the RP Department of Foreign Affairs.
Hope that didn’t cause a headache. 😀
I am here in Philippines living with my wife who has green card …but not her children 3 can I file for itin for them as dependents on taxs
Hi Robin – Unfortunately, only the dependents of U.S. taxpayers – who are not U.S. citizens or “Green Card” holders themselves – residing in Canada, Mexico, or the U.S. and its possessions are eligible to apply for and receive an Individual Tax Identification Number (ITIN) from the IRS. The only exception available for this ruling is made for a U.S. taxpayer’s spouse, solely for the purpose of the taxpayer and spouse filing a joint income tax return.
Non-U.S. citizen and non-“Green Card” holding dependents (who are not the spouses of U.S. taxpayers) residing in the Philippines are not eligible for an ITIN and cannot be claimed as “tax dependents” on an income tax return.
Dependents who reside in countries other than Canada, Mexico, or the U.S. and its possessions, must possess a U.S. Social Security Number in order to be claimed as a “tax dependent” on an income tax return. Generally, U.S. Social Security Numbers are available only to U.S. citizens and holders of a U.S. “Green Card.”
It sounds unfair, but prior to the enactment of NAFTA (the North American Free Trade Agreement among the U.S., Canada, and Mexico), no one residing outside of the U.S. and its possessions was eligible for an ITIN, save for a U.S. taxpayer’s spouse.
About the only solution for your situation would be for you to legally adopt the children and obtain either U.S. citizenship or U.S. Resident Alien (“Green Card” holding) status for them, making them eligible for a U.S. Social Security Number. (There may be a possibility of obtaining a “Green Card” for them via your wife, but I cannot verify that – it’s far outside my realm as a CPA.) You’d have to weigh the cost-benefit of taking such action – i.e., would the tax benefits of the three children being claimed as “tax dependents” on your income tax return outweigh the costs involved with the adoptions and follow-on pursuit of legal status for obtaining their U.S. Social Security Numbers.