Introduction – The Question of Tax Payer Identity
Identity can definitely be categorized as one of the buzzwords of the last decade. Our obsession with identity pervades everything, from entertainment to politics and economics. The rise of the modern feminist movement, the proliferation of new and never-before-seen gender identities, the emergence of new biometric scan technologies, the sheer number of Netflix series focused on identity crisis, all of these are hints of how crucial the concept of identity has become to us. These manifestations can all be classified under the age-old question that even drove our ancestors to several breakthrough discoveries – “who am I?”
In the digital age, the question of identity is more complex than ever, specifically when viewed within the context of the financial framework.
In India, we have the Aadhaar number that attempts to be the answer to the “who am I” question – it contains a vast amount of information, from our name and address to our fingerprint patterns. In the US, we have the SSN or Social Security Number, the personal identification number for US citizens or US Residents which contains crucial information about one’s identity – name, date of birth, area of residence, educational background, lifetime earnings, time spent working in a specific job position, and so on.
For a specific class of people, the Aadhaar number and the SSN are not enough to define their identities as tax-paying citizens. These individuals are known as non-resident aliens. This unique class of people includes those who earn income from the US but do not possess a green card signifying their citizenship. Even though their nationality is associated with a foreign country, such as India, they are required to pay taxes in the US.
Owing to the added complexity in their identities, these individuals are assigned an ITIN or Individual Tax Identification Number instead of the SSN, due to their unique association with the US financial system.
What is the ITIN?
In fundamental terms, as per the official words of the IRS, the ITIN is a tax processing number given to individuals who are not eligible for the SSN but are required to be identified as taxpayers due to their economic association with the US. In such cases, the ITIN becomes their identity and is issued to ensure that these individuals are able to comply with US tax laws. The ITIN enables non-resident aliens to carry out tax payments and file returns in the US, regardless of their immigration status. However, the ITIN does not offer any social security benefits, nor does not guarantee authorization for work within the US.
How do I know if I need an ITIN?
As mentioned above, non-resident aliens who are expected to pay taxes and file returns in the US require an ITIN. However, there is a broader set of categories that can be uncovered by delving deeper into the details of such a seemingly simple statement.
- If you fall under the category of a spouse of a resident alien visa holder, you will be required to apply for your own ITIN in certain specific cases. For instance, if your partner arrives in the US on an H1 visa, you will not be permitted to work in the country. In case your partner would like to gain the benefit of the increased standard deductions that are available under the “Married Filing Jointly” filing status, you will need an ITIN of your own. In an instance where your partner is a resident alien, he/she can choose to include you under the category of US resident alien through the “Married Filing Jointly” filing status.
- In cases where your dependent spouse has a source of foreign income, such as through dividends obtained from foreign securities, or is the beneficiary of foreign assets, he/she is expected to pay taxes on the same within the US. In such cases, he/she would need to file tax returns and hence, will be required to apply for an ITIN. This includes rental income, annuity, pension and other sources of foreign income.
- A lot of people arrive on US soil with children who are not eligible for an SSN. If you fall under this category, you can claim dependent credits or child tax credits on your tax returns, specifically if your children meet the criteria outlined under the IRS’ definition of a “qualifying child”. In such cases, you will have to obtain an ITIN for each “qualifying child” that you claim as being a dependent.
- If you are a freelancer (or any of the other types of entities that fall under the category of self-employed persons under the IRS guidelines) that works with clients in the US, who upon payment have deducted taxes at the source, you will require an ITIN in order to claim a refund on the same. Do note that the return filing in such cases will only be required if the tax which is withheld is more than what should have been withheld based on income.
- As discussed in this article, if you are planning to open a business account in the US from an American bank branch in India or are applying for a credit card from a US bank, you will need an ITIN. This also applies to mortgage applications on the part of non-resident aliens.
- If you are a student from India or any other foreign country who has received a fellowship (which includes basic living expenses as well) or is the recipient of a scholarship or research grant at a US university, you will need to apply for ITIN. In this case, it is to be noted that non-service fellowships indicates those that do not involve any type of work responsibility or job role.
How do I apply for an ITIN?
There are three main ways in which you can apply for an ITIN as a non-resident alien. The first involves mailing all the required documents and forms directly to the IRS from your home country, while the second involves getting in touch with a Certifying Acceptance Agent who will make things easier for you by handling most of the intricacies themselves.
In case you choose the first option, these are the steps that you will need to follow:
- Download Form W7 from the IRS website, complete it, and sign it. While doing so, make sure the correct option under “Reason for Applying ITIN” is chosen, whether it be as a spouse or a dependent or any other option as mentioned above
- Check, download, and fill out any other peripheral forms that apply to you as an ITIN applicant, such as Form 1040 (for filing annual income tax returns as a US return resident), Form 1040EZ (applicable for individuals with no dependents) and Form 1040NR (applicable for non-residents whose US-sourced income is only subject to taxation)
- Attach certified copies of official documents of identification, such as your passport or a government issue ID (such as the Aadhaar card, driver’s license) and civil birth certificate. In the case of such documents, the original is always preferred but if you are not able or willing to provide the same, make sure the photocopies are certified with US Embassy
- Once all these have been accumulated and verified, you can send them to the IRS via mail to the following address:
Internal Revenue Service
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342
As per the second option, you can look up a list of Certifying Acceptance Agents (CAAs) within your city. These are individuals who have been trained and certified by the IRS in assisting foreign individuals in the ITIN application process. The CAAs are authorized by the IRS to also authenticate documents such as passports, birth certificates presented by foreign individuals. The same forms and documentation apply when it comes to working with a CAA. The CAA conducts a personal interview with the primary applicant as well as the dependent and secondary applicants as a part of the processing procedure.
Some crucial points to keep in mind
Unlike the SSN, which has no expiry date or period associated with it, the ITIN comes with a fixed expiry and certain regulations around the same. If you fail to file taxes under your assigned ITIN for three consecutive years, your tax identity will be considered null and void, which in other words means that your tax identification number will not be valid anymore. Moreover, if you receive your SSN at some point in time, for instance, after waiting for years in the limbo of the green card backlog, your ITIN will no longer be valid.
The ITIN, once obtained, can serve some valuable purposes for non-resident aliens. For instance, you can provide your assigned ITIN as identification for the purposes of securing a driver’s license or a driver’s permit in the US. Obtaining a driver’s license without a green card is possible in certain states, such as Washington State, Illinois, Utah (only driver’s permit is valid in this state), and New Mexico. The ITIN can also double up as proof of US residency for any other future purposes, allowing resident aliens to prove how long they have lived in the country. At the same time, certain benefits that SSN holders can avail are not applicable to those whose identities are defined by the ITIN in the US tax system. For instance, the EITC or Earned Income Tax Credit is not available for ITIN holders while it is one of the core benefits that SSN holding taxpayers can avail. On the flip side, if an ITIN holder eventually becomes an SSN holder, the earnings reported during his/her time in the US during which he/she paid taxes using the ITIN can be eligible for benefits under the new residency status. Either way, looking for professional USA CFO consulting services can be a good move when it comes to ITIN-related aspects.