How To Prepare Taxes For Deferred Action For Childhood Arrivals (DACA) Recipients

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 U.S. called “deferred action.” The Obama administration called this program Deferred Action for Childhood Arrivals, or 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.
Once the U.S. Citizenship and Immigration Services (USCIS) issues an EAD work permit, the DACA recipient can apply for a social security number. The social security card will read “valid for work only with DHS authorization”. Use this social security number to file their taxes. Do not use an ITIN. 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.
Since DACA recipients are eligible to work, they may qualify for the earned income tax credit (EITC). For tax year 2017, this can be up to $6,318 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.
DACA recipients also qualify for the Child Tax Credit, the Child and Dependent Care Credit, and the American Opportunity Credit. Their DACA status does not disqualify them from these credits.
When it comes to the Affordable Care Act, the individual mandate does not apply to a DACA recipient. Since they are not “lawfully present” in the U.S. they do not qualify for the Premium Tax Credit. They also will not face a penalty for not having health insurance. Complete and file form 8965, 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”.
Now, if the DACA recipient has lawfully present resident or citizen children, they need to make sure the children are insured. The “code C” exemption only applies to the DACA recipient not to the lawfully present children. Your DACA client may still face an ACA penalty if their children are not insured and don’t qualify for an exemption.
On September 5th, 2017, the Department of Homeland Security (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 employment authorization document (EAD).
This is very important because if your DACA client has an expired permit, they are not eligible to receive the earned income tax credit (EITC). It doesn’t matter if they have a social security number and receive a W-2. For their income to count towards the EITC, they must have earned this income during the period they were authorized to work in the U.S. 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 January 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 U.S. Citizenship and Immigration Services (USCIS) to begin accepting DACA renewal applications again.
At this time, the USCIS has resumed accepting requests to renew a grant of deferred action under DACA. USCIS is not accepting requests from individuals who have never been granted deferred action under DACA. Until further notice, the DACA policy will be operated on the terms in place before it was rescinded on September 5th, 2017.
The main thing to understand when working with DACA clients is that even though they are authorized to work in the U.S., 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 Affordable Care Act. 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 where their work permit was active.

Have a question? Contact Carlos Lopez.Your comments are always welcome!

Aaron C. Giles is the Founder and President of Agile Consulting Group. Aaron spent five years working within the specialty niche of Sales & Use Tax at Brown & Associates before forming his own firm in 2005. He has worked hundreds of audits in states all across the U.S. during that time and has delivered savings of over $75M in the form of refunds and credits to his clients. Today, he leads a group of talented, detail-oriented colleagues who focus exclusively on Sales & Use Tax.

Some of our firms’ greatest achievements have come in successfully arguing new and unique perspectives to existing tax law in various states enabling our clients to claim exemptions on categories of purchases previously held to be taxable. Included in these victories are: communication services taxes for religious nonprofit hospitals in FL, bulk purchases of drugs in VA, specific surgical tools and instruments for healthcare providers in TX, printing plates in GA, railroad utilities in KY, and most recently software in AL.

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