The voices of Tax Policy Center's researchers and staff
Along with over 100 million others, I recently filed my 2017 federal income tax return. This was a special occurrence, because it was the first tax return since I began working at the Tax Policy Center (TPC). But despite a heightened awareness of the tax world and a fairly straightforward tax situation (I am single with no children and my sole income source is wages), I found the process challenging, primarily because I am a nonresident.
Most Americans are proud to pay taxes; about nine in ten see taxpaying as a civic duty. So do most immigrants and nonresidents, regardless of their lawful status. But the US government does not make it easy, and prevailing myths about immigrants' compliance with taxes certainly do not help.
A nonresident is defined largely by what they are not. A nonresident is not a US citizen, is not a lawful permanent resident (green card holder), is not married to a US citizen, and has not lived in the US for 183 days over the last three years. Individuals with student visas, for example, may not count their years of stay towards that threshold. A nonresident files a Form 1040NR, not the usual Form 1040 that American citizens use.
Unlike US citizens, nonresidents may not file jointly if married, take the standard deduction, claim more than one personal exemption, or take the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit. Nonresident families with children who are US citizens must navigate a different web of complex rules to determine if they can take the Child Tax Credit (CTC).
Beyond the technical nuances, the political rhetoric aimed at punishing all immigrants for using tax credits creates another hurdle for nonresidents. A recent proposal from Department of Homeland Security (DHS) would push all nonresidents and noncitizens as such to weigh the benefits of popular tax deductions against possible detriment to their residency status.
Many Americans fear filing incorrectly and getting audited by the IRS or owing more money than they can afford. Nonresidents may feel these concerns even more deeply. The lack of affordable tax preparation options can make filing particularly challenging. Intuit's TurboTax and its "IRS free file" equivalent TurboTax Freedom do not support the 1040NR, the income tax return form for nonresidents. Form 1040NR cannot be electronically filed through most paid software options either, and thus, many nonresidents must file paper returns. They may have to wait for four to six weeks for returns to be processed and to get their tax refunds, and risk incurring penalties for late filing if their returns are lost in transit.
Some nonresidents rely on the Volunteer Income Tax Assistance (VITA) program, an excellent resource for lower-income taxpayers. But for first-time filers, these programs can be overwhelming because of long waiting times and the extensive documentation proper tax filing requires. Discussing sensitive information, financial or otherwise, with unfamiliar tax preparers can serve as an additional barrier to trust.
Because of these obstacles, it is likely that many nonresidents are overwithheld and fail to claim income tax refunds they are owed. For instance, I did not realize that I was entitled to a refund for withheld taxes while I was working as a student. So, I did not file a return to claim my refund for 2014 until I filed my 2016 income tax return. The IRS estimates that outstanding, unclaimed, and undeliverable refunds totaled $1.1 billion from 2014. I would not be surprised if nonresidents comprised a significant portion of those who are owed money.
Payroll taxes present a different problem for nonresidents. Employers are not supposed to withhold Medicare and Social Security taxes from nonresidents' paychecks because nonresidents do not benefit from these programs, but many employers erroneously do so. Foreign-born workers often do not know what these taxes are for (who understands the Federal Insurance Contributions Act?) and may not know enough to request that their employers not withhold these taxes. In that case, the nonresident would have to resolve the issue directly with the IRS and Social Security Administration long after the taxes are withheld. Because many nonresidents never get the refunds they are due, and because they cannot collect benefits, their taxes produce a windfall for Social Security.
This is especially true for undocumented immigrants. The chief actuary of Social Security has said that the system "would have entered persistent shortfall of tax revenue to cover payouts starting in 2009" if it were not for undocumented immigrants paying billions of dollars in Social Security taxes but unable to collect benefits.
In addition to the bureaucratic hurdles, it is important to remember that taxpayers and taxes do not exist in isolation. At a time when many paint nonresidents (immigrants of color, in particular) as criminals and a burden on the US economy, it is easy to see why our relationship with taxes is complicated. Even if we do our part as upstanding taxpayers, the tensions induced by racial intolerance and institutional barriers are inescapable. Immigrants of all statuses pay federal, state, and local taxes and have a positive impact on long-run economic growth, innovation, and entrepreneurship in the US. Denying the economic and social contributions of all immigrants not only impugns their political standing, but may also contribute to fear and toxic stress that is part of their daily lives.
I have many tax filing advantages over my fellow nonresidents. I am fluent in English, well-educated and, let’s face it, a tax geek who is surrounded by even bigger tax geeks at TPC. Yet, even I struggle to comply with the US tax system. There is a lack of social and political effort and support to make the process easier for nonresidents. Whatever lawmakers think about nonresidents, there is no reason why they can’t make it easier for us to file our US taxes.
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