Rules for refundable tax credits could get tighter

If the Trump administration's America First budget plan for 2018 ever gets approved as proposed, anyone claiming the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC) would face a new requirement: They must have a Social Security number and be legally authorized to work in the U.S.

Critics howl that this would deny refundable tax credits to low-income immigrants.

But U.S. citizens and legally admitted immigrants with work authorization already meet these requirements. These new requirements would prevent only undocumented immigrants from claiming refundable tax credits.  

The EITC and CTC have provided a subsidy to lower-income people who want to work. But according to president's budget plan, "Since the EITC is a work support (benefit), only those people who are lawfully eligible to work in the United States should be able to claim it." 

These tax credits are called "refundable" because people who don't earn enough to pay taxes can still get a tax refund. For 2017, that could be as much as $6,318 for the EITC and up to $1,000 for each qualifying child for the CTC. Currently, all that's required to claim these tax refunds is meet the income limits and file a tax return.

The EITC and CTC have been found to be especially prone to fraudulent tax refunds. The Treasury inspector general for tax administration issued a report estimating the potential improper payment rate for the CTC was as high as 30 percent, or $7 billion per year. The most recent IRS review estimated that about 24 percent of EITC refunds, totaling over $14 billion per year were paid in error.  

Generally, only lawfully admitted noncitizens authorized to work in the U.S. by the Department of Homeland Security (DHS) can get a Social Security number. That allows lawfully admitted immigrants to report wages to the IRS and lets the Social Security Administration determine their eligibility for benefits and other government services.   

Generally, immigrants not authorized to work can apply for an individual taxpayer identification number (ITIN) and use it for tax purposes, including filing returns. Under current rules, ITINs can be used to claim refundable tax credits.

In limited situations, immigrants not authorized to work in the U.S. can obtain a Social Security number for a valid nonwork reason. Under current law, individuals can use a nonwork-issued SSN to file a tax return and claim refundable tax credits. The Trump budget plan would close that loophole.

Applying for a SSN valid for work is free, and immigrants have two ways to do so. They can apply in their home country when filing out an application with the State Department for an immigrant visa and work permit. Or after arriving in the U.S., they can visit a Social Security office. Here's a list of the items needed to bring when you go to a Social Security office.  

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.