How to Prepare Taxes for DACA Recipients in 2020
On June 15, 2012, the U.S. Department of Homeland Security (DHS) announced that it would not deport certain undocumented youth who came to the United States as children. Under a directive from the DHS secretary, these youths may be granted a type of temporary permission to stay in the United States called “deferred action.” The Obama administration called this program Deferred Action for Childhood Arrivals (DACA). This article is designed to provide guidance for tax professionals preparing and filing tax returns for DACA recipients.
The first thing to note is that DACA recipients are authorized to work in the United States. They are provided with an employment authorization document (EAD) that allows them to work legally. The EAD is also known as a work permit or I-766.
Social Security Numbers
Once the U.S. Citizenship and Immigration Services (USCIS) issues an EAD work permit, the DACA recipient can apply for a Social Security number (SSN). The Social Security card will read “valid for work only with DHS authorization.” Use this SSN to file their taxes. Do not use an Individual Taxpayer Identification Number. Take a look at Publication 3535 to see what this Social Security card looks like.
It is also important to let your DACA clients know that the IRS does not share taxpayer information with other government agencies. DACA recipients should not be afraid to file a tax return. Filing a tax return may help them in the future with their immigration case if they need to show compliance with tax requirements, proof of their income or prove their physical presence in the United States.
Earned Income Tax Credit
Since DACA recipients are eligible to work, they may qualify for the earned income tax credit (EITC). For tax year 2019, this can be up to $6,557 for taxpayers with three or more qualifying children. Make sure to follow due diligence when preparing the tax return. Ask to see a copy of their Social Security card and the EAD work permit. Make sure the work permit is active and not expired.
Child Tax Credit and Other Credits
DACA recipients may also qualify for the Child Tax Credit, the Child and Dependent Care Credit, the American Opportunity Credit, and the new Other Dependent Credit. Their DACA status does not disqualify them from these credits.
Affordable Care Act
When it comes to the Affordable Care Act (ACA), the individual mandate does not apply to a DACA recipient. Since they are not “lawfully present” in the United States, they do not qualify for the Premium Tax Credit. They also will not face a penalty for not having health insurance.
For tax years 2017 and 2018, complete and file Form 8965, Health Coverage Exemptions, Part 3, to grant them a health coverage exemption. Use code C: “Not lawfully present in the U.S and not a U.S. citizen or U.S. national.”
For tax year 2019, the ACA penalty has been reduced to $0. If the DACA recipient did not have insurance, they will not face a penalty. Form 8965 has been discontinued.
Now, if the DACA recipient has lawfully present resident or citizen children, they can apply for the Advanced Premium Tax Credit (APTC) on their behalf. They can visit the healthcare marketplace and apply as an non-applicant, report their income, and possibly receive the APTC for their children. They then need to fill out Form 8962 with their tax return to reconcile the credit.
Latest on DACA
On Sept. 5, 2017, the DHS initiated the orderly phase out of the DACA program. The DHS memo made it clear that DACA and work permits (employment authorization documents) will remain valid until their expiration date. To determine when your client’s DACA and work permit expire, check their I-765 Approval Notice or the bottom of their I-766 EAD.
This is very important. If your DACA client has an expired permit, they are not eligible to receive the EITC. It doesn’t matter if they have a SSN and receive a W-2. For their income to count toward the EITC, they must have earned this income during the period they were authorized to work in the United States. If their permit expired mid-year, you must pro-rate the income they earned and only include the qualifying income in the EITC calculation. This is part of your due diligence.
On Jan. 9, 2018, Judge William Alsup of the U.S. District Court for the Northern District of California ordered a halt to the federal government’s termination of the DACA program. Alsup granted a preliminary injunction requiring USCIS to begin accepting DACA renewal applications again.
On April 24, 2018, Judge John D. Bates of U.S. District Court for the District of Columbia ruled that the deportation protections afforded by the DACA program must stay in place and the government must resume accepting new applications. The judge gave the Department of Homeland security 90 days to explain its reasoning for cancelling the program. If the department fails to justify its decision within 90 days, the cancellation of the program will be rescinded and USCIS must begin accepting new applications.
On November 8, 2018, the Ninth Circuit issued a decision affirming the lawfulness of the preliminary injunction in Regents. In its decision, the court reasoned that the plaintiffs in the case were likely to prevail on their claim that the Trump administration’s termination of DACA was “arbitrary and capricious” and therefore unlawful.
On June 28, 2019, the Court decided that it will review three of the petitions: Regents, Batalla Vidal, and NAACP. The three cases have been consolidated, and a total of one hour was allotted for oral argument.
On November 12, 2019, the Court heard oral arguments on these cases. A decision is expected no later than June 2020.
At this time, the USCIS has resumed accepting requests to renew a grant of deferred action under DACA. The USCIS is not accepting new requests as we are awaiting the Court's decision.
The main thing to understand when working with DACA clients is that even though they are authorized to work in the United States, they are technically, not lawfully, present. This means that they may be eligible for the EITC, but are not subject to the individual mandate of the ACA. If your DACA clients are receiving the EITC, take extra steps to verify their work permit and make sure the income they’re using to qualify for the EITC was earned during a period when their work permit was active.