How Do Undocumented Immigrants Pay Taxes?

Navigating the complexities of the U.S. tax system involves understanding the various ways individuals contribute, regardless of their immigration status, so, How Do Undocumented Immigrants Pay Taxes? Despite being barred from many federal benefits, undocumented immigrants contribute significantly to the U.S. tax system through various means, including income, payroll, sales, and property taxes; this article seeks to uncover the mechanisms, dispel the myths, and explore the economic impacts of undocumented immigrants’ tax contributions, highlighting their role in sustaining public services and infrastructure. This article examines how undocumented immigrants navigate the tax system, the types of taxes they pay, and the economic impact of their contributions. It will also address common misconceptions and discuss potential policy implications related to work authorization and tax revenues.

The ITIN Lifeline: Filing Taxes Without a Social Security Number

• Individual Taxpayer Identification Number (ITIN): The IRS issues a nine-digit tax ID (format: 9XX-XX-XXXX) since 1996. As of 2021, there were over 5.8 million active ITINs, mainly for undocumented filers, visa holders, and survivors of domestic violence. ITINs exist solely for tax compliance and do not grant work authorization or benefits.
• Tax Reporting: Undocumented workers file returns to report wages, self-employment income, or rental earnings.
• No Legal Status Required: The IRS issues ITINs regardless of immigration status, requiring only proof of identity (e.g., foreign passport).
• Refund Eligibility: ITIN filers can claim refunds for overpaid income taxes but are generally excluded from credits like the Earned Income Tax Credit (EITC).
• In 2015, ITIN filers paid $23.6 billion in total taxes, including $5.5 billion to Medicare and Social Security.
• ITINs were created in 1996 by the IRS to enable noncitizens who earn income in the United States, including legally-present noncitizens without Social Security numbers, to pay taxes on money earned in the United States.
• To obtain an ITIN, one needs to fill out an application form, include a federal income tax return, and furnish proof of identity, without needing to prove work authorization or legal status in the United States.
• Tax information on ITIN holders is protected under privacy laws and cannot be shared with the Department of Homeland Security or Immigration and Customs Enforcement.

Breaking Down the Tax Bill

Undocumented immigrants contribute to tax systems through various means:

1. Payroll Taxes: Employers withhold 7.65% (Social Security + Medicare) from paychecks, even without valid work authorization. These contributions flow into federal “suspense files,” totaling $32.3 billion in 2022.
2. Income Taxes: ITIN filers paid $19.5 billion in federal income taxes in 2022.
3. Sales & Property Taxes: Undocumented households paid $37.3 billion in state/local sales and property taxes in 2022, including $8.5 billion in California alone. Renters indirectly pay property taxes through landlords, who factor these costs into monthly rent.

Myths vs. Facts

• Myth: “They Don’t Pay Taxes”
  • Fact: Six million undocumented immigrants file taxes annually via ITINs, contributing $96.7 billion in 2022, rivaling corporate tax revenues.
• Myth: “They Drain Public Funds”
  • Fact: Undocumented immigrants are ineligible for Social Security, SNAP, Medicaid, and unemployment benefits. Their taxes fund services they cannot use.
• Myth: “ITINs Enable Fraud”
  • Fact: The IRS vets ITIN applicants rigorously. Fraudulent claims trigger audits, and ITINs can’t be used for non-tax purposes like driver’s licenses.

Economic Impact: The $40 Billion Opportunity

Granting work authorization could boost annual tax revenues by $40.2 billion, according to the Institute on Taxation and Economic Policy (ITEP). Legal status reduces under-the-table work, increases wage reporting, and expands income tax bases.

Policy Challenges & Solutions

• Child Tax Credit Restrictions: Post-2017 reforms require Social Security numbers to claim refunds, excluding 4 million U.S.-citizen children with undocumented parents.
• State-Level Innovations: California and Colorado offer state-level EITCs to ITIN filers, recognizing their contributions.
• The IRS is focused on maintaining a broad tax base, while immigration enforcement officials want to enforce the law against unauthorized work.
• Conflicting interests would require legislative change.

Applying for an ITIN

To apply for an ITIN:

1. Complete Form W-7, Application for IRS Individual Taxpayer Identification Number, along with their federal income tax return.
2. Prove their identity and foreign nationality status by providing a combination of original documents or certified copies of the documents.

The IRS will accept only a combination of 13 documents as proof of identity and/or foreign nationality status:

• Passport (the only stand-alone document)
• U.S. Citizenship and Immigration Services (USCIS) photo identification
• Visa issued by the U.S. Department of State
• U.S. driver’s license
• U.S. military identification card
• Foreign driver’s license
• Foreign military identification card
• National identification card (must contain name, photograph, address, date of birth, and expiration date)
• U.S. state identification card
• Foreign voter’s registration card
• Civil birth certificate
• Medical records (valid only for dependents under age 6)
• School records (valid only for a dependent under age 18, if a student)

Applicants can apply for an ITIN by mail, in person through a designated IRS Taxpayer Assistance Center (TAC), or with the help of an Acceptance Agent (AA) or a Certified Acceptance Agent (CAA) authorized by the IRS.

FAQs