What is a Tax Purpose for ITINs?

A “tax purpose” for an individual is the reason why they file a tax return or are listed on the tax return of someone else. It is not the same thing as a tax filing requirement, however, tax filing requirement is a tax purpose. People who have no tax filing requirement can and still should file their tax returns. One reason that people with no requirement to file will file anyway is to obtain tax credits that may result in their getting a large refund. A tax refund by definition is a return of an overpayment, however various tax credits are “refundable” and that means that even if you have no taxes to offset, you will get that amount added to your refund. 

For example, one goal of the US tax code is to ease the financial burden of raising children. To achieve this goal, the tax code includes tax credits to assist families with children, which means that taxpayers with children will get a tax break that childless taxpayers do not get. This helps to ensure that taxpayers with children have more money to spend on their children’s basic needs.

In order to get various tax credits, a taxpayer or an individual listed on a tax return must have a tax purpose or a reason they exist on the tax return in the first place. With the passing of the Tax Cuts and Jobs Act (TCJA) personal exemptions were removed while doubling the standard deduction based on filing status. The removal of personal exemptions resulted in the automatic removal of an inherent tax purpose for anyone who is listed on a tax return that didn’t have another reason for being listed as a dependent.

For example, let’s say a taxpayer and spouse have two children. Taxpayer and spouse are both undocumented immigrants, one child is an undocumented immigrant and the other child is a US citizen. The taxpayers would like to file their taxes and claim child tax credit for both of their children. Let’s explore the tax purpose implications in this scenario. 

Taxpayer and Spouse- Automatically have tax purpose by filing a tax return

Immigrant Dependent- Has tax purpose if only if tax return is eligible to claim the Credit for Other Dependents (or other credit for this dependent). This dependent is not eligible for CTC without a social security number. 

Citizen Dependent- Has tax purpose due to having a social security number, being eligible for Child Tax Credit and/or other credits

If the couple applies for ITINs and files taxes before April 20th, they will likely get both child tax credit and the credit for other dependents (given assumed tax liabilities). If the couple files the tax return and applies for ITINs for themselves and the undocumented child after the April deadline, given that there was no possible extension because this is an original ITIN application, they will likely not get the credit for other dependents because they are not filing timely, and they will likely not receive an ITIN for the dependent who is not a citizen because the tax purpose inherent in being claimed for that credit is now gone (and since TCJA there is no inherent tax purpose due to personal exemption). 

But let’s take it a step further and say that the taxpayers file before the deadline, but they have no tax liability for the credit for other dependents to offset. What happens then? No credit, no personal exemption, no tax purpose. 

Ok, now, let’s say that instead of the taxpayers being a married couple, we have a single individual with one undocumented dependent. Single individual has no tax liability so the return is not eligible for the credit for other dependents, BUT in claiming their child, they have an increase in the standard deduction based on filing status. The tax purpose for the dependent in this case is derived from increased standard deduction from the the change in filing statuses. 

These are just a couple of examples of what a tax purpose looks like. Tax purpose can change based on several factors so if you are seeking to apply for an ITIN, be sure that the tax purpose of each ITIN applicant is explicit and present on the tax return. 

What are some common reasons for wanting an ITIN that do not provide a tax purpose? 

“I want to open a bank account.”

“I want to buy a house.”

“I need insurance.”

Can these prospects still obtain an ITIN? Yes, if you are able to find a valid tax purpose. 

 


Posted: October 10, 2023

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