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The Trump Tax Plan Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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When the Trump tax plan, formally known as The Tax Cuts and Jobs Act (TCJA), was enacted in 2017, taxes changed drastically for many Americans. Noted as the most sweeping rewrite of the tax code in more than three decades, the tax reform implemented new federal income tax brackets and doubled the standard deduction, among many other changes.

The majority of the Trump tax plan’s changes went into effect on Jan. 1, 2018, which means most Americans felt the impact of the TCJA for the first time when they filed their 2019 taxes.

What the Trump tax plan changed

Some of the changes made by the Trump tax plan may already be familiar to you, but here you can read about all of the changes it introduced or jump ahead to read about the rules you’re most interested in:

A 529 college savings plan is a tax-advantaged savings account designed to encourage saving for qualified future higher-education costs, such as tuition, fees and room and board. Your money is invested and grows tax free.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previously, 529 plan savings could only be used on qualified higher education expenses.

New Rule (Effective Jan. 1, 2018)

In a major victory for wealthier families, you can now use 529 savings for private K-12 schooling.

Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.

The new rules allow you to withdraw up to $10,000 a year per student (child) for education costs.

The individual mandate was a key provision of the Affordable Care Act that required non-exempt U.S. citizens and noncitizens who lawfully reside in the country to have health insurance.

Old Rule

New Rule (Effective Jan. 1, 2019)

Consumers who did not qualify for an exemption and chose not to purchase insurance faced a range of tax penalties, depending on income.

New Rule (Effective Jan. 1, 2019)

The individual mandate is out.

Starting Jan. 1, 2019, consumers who do not purchase health insurance will no longer face penalties.

GOP lawmakers argue that the measure will decrease spending on the tax subsidies it offers to balance out the cost of premiums for millions of Obamacare enrollees.

However, without the mandate, experts caution that fewer healthy and young people will sign up for health coverage through the insurance marketplace, which will likely lead to increases in premium costs for those who remain the marketplace and could even induce some insurers to drop out of the market altogether. It’s a big blow to supporters of the long-embattled health care law.

Old Rule

New Rule (Effective Jan. 1, 2019)

The individual paying alimony or maintenance payments could deduct payments from their income. The person receiving the payments included them as income.

New Rule (Effective Jan. 1, 2019)

The person making alimony or maintenance payments does not get to deduct them, and the recipient does not claim the payments as income. This goes into effect for any divorce or separation agreement signed or modified on or after Jan. 1, 2019.

The individual alternative minimum tax, or AMT, often imposed on higher-income families, especially those with children, who live in high-tax states — but not necessarily the ultra rich. It requires many households or individuals to calculate their tax due under the AMT rules alongside the rules for regular income tax. They have to pay the higher amount. Whether or not a someone pays AMT depends on their alternative minimum taxable income (AMTI). AMTI is determined through a series of assessments of a taxpayer’s income and assets — the explanation of calculating AMTI takes up two pages in the tax bill, so we’re not getting into the details here.

Old Rule

New Rule (Effective Jan. 1, 2018)

The exemption amount was $84,500 for married joint-filing couples, $54,300 for single filers and $42,250 for married couples filing separately.

The AMT exemption began to phase out at $120,700 for singles, $160,900 for married couples filing jointly and $80,450 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The AMT is here to stay but fewer households will have to face it.

Under the new rules, which are in effect from Jan. 1, 2018 through Dec. 31, 2025, married couples filing jointly will be exempt from the alternative minimum tax starting at $109,400. Exemption starts at $70,300 for all other taxpayers (other than estates and trusts).

The exemption phase-out thresholds will rise to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers could exclude up to $20 a month of qualified bicycle commuting reimbursements from their gross income. That included payments from employers for things like a bicycle purchase, bike maintenance or storage. Workers could claim the exclusion in any month they regularly use a bicycle to commute to work and do not receive other transit benefits.

New Rule (Effective Jan. 1, 2018)

The exclusion is suspended through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

The child tax credit was $1,000 per child under the age of 17.

The credit was reduced by $50 for each $1,000 a taxpayer earned over certain thresholds. The phase-out thresholds started at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The child tax credit doubles to $2,000 per qualifying child. Up to $1,400 of the child tax credit can be received as refundable credit (meaning it can go toward a tax refund). The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child.

The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.

This rule is in effect through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Under a four-step graduated rate structure, the top corporate tax rate was 35 percent on taxable income greater than $10 million.

New Rule (Effective Jan. 1, 2018)

Permanently cuts the top corporate tax rate to 21 percent.

The estate tax, aka the “Death Tax” is a tax levied on significantly large estates that are passed down to heirs.

Old Rule

New Rule (Effective Jan. 1, 2018)

Estates up to $5.49 million in value were exempt from the tax.

The top tax rate was 40 percent.

New Rule (Effective Jan. 1, 2018)

Doubles the exemption for the estate tax.

Now, estates up to $11.2 million are exempt from the tax.

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners could exclude up to $250,000 (or $500,000, if married filing jointly) of gains made when selling their primary residence, as long as they owned and primarily lived in the home for at least two of the five years before the sale. The exclusion could be claimed only once in a two-year period.

New Rule (Effective Jan. 1, 2018)

Homeowners can still exclude gains up to $250,000 (or $500,000 if married filing jointly) when they sell their primary residence, but they have to have lived there longer. People who sell their homes after Dec. 31, 2017 now have to use the home as their primary residence for five of the eight years before the sale in order to claim the exclusion. It can only be claimed once in a five-year period.

The new rule expires on Dec. 31, 2025.

Old Rule

New Rule

Taxpayers were previously allowed to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income or 7.5 percent if they or their spouse were 65 or older.

New Rule

The threshold for all taxpayers to claim an itemized deduction for medical expenses is lowered to 7.5 percent of a filer’s adjusted gross income.

The change applies to taxable years from Dec. 31, 2016 to Jan. 1, 2019.

Taxpayers can take the miscellaneous tax deduction if the items total more than 2 percent of their adjusted gross income. The amount that’s deductible is the amount that exceeds the 2 percent threshold. These are some of the major changes coming to the miscellaneous tax deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers could claim an itemized deduction of the amount of money they pay for tax-related expenses, like the person who prepares their taxes or any software purchased pr fees paid to fee to file forms electronically.

Work-related expenses: Workers could deduct unreimbursed business expense as an itemized deduction, like the cost of a home office, job-search costs, professional license fees and more.

Investment fees: Taxpayers could deduct fees paid to advisors and brokers to manage their money.

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers may not claim tax-preparation expenses as an itemized deduction through 2025.

Work-related expenses: The bill suspends work-related expenses as an itemized deduction through 2025.

Investment fees: Under the new rules, the investment fee deduction is suspended until 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners were allowed to deduct interest paid on mortgages valued up to $1 million on a taxpayer’s principal residence and one other qualified residence.

They could also deduct interest paid on a home equity loan or home equity line of credit no greater than $100,000. These were itemized deductions.

New Rule (Effective Jan. 1, 2018)

New homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home in their itemized deductions.

The old, $1 million caps continues to apply to current homeowners (those who took out their mortgages on or before Dec. 15, 2017), as well as refinancing on mortgages taken out on or before Dec. 15, 2017, as long as new mortgage amount does not exceed the amount of debt being refinanced.

Homeowners CAN deduct interest paid on a home equity line of credit or home equity loan, so long as the loan was used to buy, build or substantially improve your home.

These changes are set to expire after 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previous tax law allowed taxpayers to deduct moving expenses as long as the move was of a certain distance from the taxpayer’s previous home and the job in the new location is full-time.

New Rule (Effective Jan. 1, 2018)

The new tax bill suspends the moving expense deduction through 2025. Until then, taxpayers are not permitted to deduct moving expenses.

Moving-related deductions and exclusions remain in place for members of the military.

Pass-through businesses are generally small businesses (also some big firms) that don’t pay the corporate income tax. Instead, the owners report the corporate profits as their own income and pay taxes based on the individual tax rates along with their regular personal income tax.

Some of the common types of pass-through businesses are partnerships, LLCs (limited liability companies), S corporations and sole proprietorships.

Old Rule

New Rule (Effective Jan. 1, 2018)

All pass-through business owners’ income was previously subject to regular personal income tax.

New Rule (Effective Jan. 1, 2018)

Under the new laws, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning $157,500 and married couples earning $315,000 are eligible for the fullest deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Individuals could deduct uninsured losses above $100 when property was lost to a fire, shipwreck, flood, storm, earthquake or other natural disaster. The deduction was allowed as long as the total loss amounted to greater than 10 percent of the taxpayer’s adjusted gross income.

New Rule (Effective Jan. 1, 2018)

The new tax bill only allows taxpayers to claim the deduction if the loss occurred during a federally declared disaster, through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers could reduce their adjusted gross income by claiming personal exemptions — generally for the taxpayer, their spouse and their dependents.

Taxpayers could deduct $4,050 per exemption in 2017, though the deduction was phased out for taxpayers earning more than certain AGI thresholds. The phase out began at an AGI over $313,800 for married couples filing jointly, $287,650 for heads of household, $156,900 for married couples filing separately and $261,500 for all other taxpayers.

New Rule (Effective Jan. 1, 2018)

Personal exemptions have been suspended through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers who did not itemize could claim the current standard deduction of $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly

New Rule (Effective Jan. 1, 2018)

Standard deductions for all nearly double under the new rules.

Individuals see standard deductions rise to $12,000; forlim heads of household, it rises to $18,000; and for married couples filing jointly the standard deduction increases to $24,000.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers had the option of including state and local property, income and sales taxes as itemized deductions.

New Rule (Effective Jan. 1, 2018)

Taxpayers are limited to claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.

Taxpayers cannot get around these limits by prepaying 2018 state and local income taxes while it is still 2017. The bill says nothing about prepaying 2018 property taxes.

Old Rule

New Rule (Effective Jan. 1, 2018)

Student loan debt discharged due to death or disability was taxed as income.

New Rule (Effective Jan. 1, 2018)

Under the new tax bill, student loan debt discharged due to death or disability after Dec. 31, 2017, will not be taxed as income. The rule lasts through 2025.

The table below shows the difference between the tax rates and brackets before the Trump tax plan went into effect on Jan. 1, 2018 and after.

Tax Rules Pre-TCJA

Tax Rules Post-TCJA

Before 2018, there were seven tax brackets.

The rate on the highest earners was 39.6 percent for taxpayers earning above $418,400 for individuals and $470,700 for married couples filing taxes jointly.

New Rule (Effective Jan. 1, 2018)

The new rules retain seven tax brackets, but the brackets have been modified to lower most individual income tax rates. The new brackets expire in 2027.

Top income earners — above $500,000 for individuals and above $600,000 for married couples filing jointly — falls from 39.6 percent to 37 percent.

The majority of individual income tax changes would be temporary, expiring after Dec.
31, 2025.

Pre-TCJA Tax Brackets Post-TCJA Tax Brackets (Effective Jan. 1, 2018)
Single Individuals
Taxable Income Tax Bracket Taxable Income Tax Bracket
$9,325 or less 10% $9,525 or less 10%
$9,326 to $37,950 15% $9,526 to $38,700 12%
$37,951 to $91,900 25% $38,701 to $82,500 22%
$91,901 to $191,650 28% $82,501 to $157,500 24%
$191,651 to $416,700 33% $157,501 to $200,000 32%
$416,701 to $418,400 35% $200,001 to $500,000 35%
Over $418,400 39.60% Over $500,000 37%

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income Tax Bracket Taxable Income Tax Bracket
$18,650 or less 10% $19,050 or less 10%
$18,651 to $75,900 15% $19,051 to $77,400 12%
$75,901 to $153,100 25% $77,401 to $165,000 22%
$153,101 to $233,350 28% $165,001 to $315,000 24%
$233,351 to $416,700 33% $315,001 to $400,000 32%
$416,701 to $470,700 35% $400,001 to $600,000 35%
Over $470,700 39.60% Over $600,000 37%

Heads of Households
Taxable Income Tax Bracket Taxable Income Tax Bracket
$13,350 or less 10% $13,600 or less 10%
$13,351 to $50,800 15% $13,601 to $51,800 12%
$50,801 to $131,200 25% $51,801 to $82,500 22%
$131,201 to $212,500 28% $82,501 to $157,500 24%
$212,501 to $416,700 33% $157,501 to $200,000 32%
$416,701 to $444,550 35% $200,001 to $500,000 35%
Over $444,550 39.60% Over $500,000 37%

Married Individuals Filing Separate Returns
Taxable Income Tax Bracket Taxable Income Tax Bracket
$9,325 or less 10% Not over $9,525 10%
$9,326 to $37,950 15% $9,525 to $38,700 12%
$37,951 to $76,550 25% $38,701 to $82,500 22%
$76,551 to $116,675 28% $82,501 to $157,500 24%
$116,676 to $208,350 33% $157,501 to $200,000 32%
$208,351 to $235,350 35% $200,001 to $300,000 35%
Over $235,350 39.60% Over $300,000 37%

Tax deductions that didn’t change after the Trump tax plan

Teacher deduction

Teachers can deduct up to $250 for unreimbursed expenses for classroom supplies or school materials from their taxable income.

Electric cars

Electric car owners who bought a vehicle after 2010 may be given tax credit of up to $7,500, depending on the battery capacity.

Adoption assistance

Adoptive parents are allowed a tax credit and employer-provided benefits up to $13,570 per eligible child in 2017.

Student loan interest deduction

Student loan borrowers may deduct up to $2,500 on the interest paid for student loans every year.

How the Trump tax plan affects you

Low-income earners: Changes to the tax rates at lower-income levels were less pronounced or nonexistent compared to the changes in higher brackets, offering no tax break for lower-income households.

Middle-class earners: The decreased tax rates should have decreased the taxable income for middle-class earners, as long as they adjusted their W-4 withholding forms.

High-income earners: With their high levels of income falling into more brackets, high-income taxpayers had more to gain from the lowered tax rates. Those with large amounts of income from investments also benefited from the decreased tax brackets for capital gains, meaning their investment income was also reprieved, especially at high levels.

High-value estates: The Trump tax plan doubled the estate tax exemption amount from $5.49 million in 2017 to $11.2 million in 2018.

Areas with high state and local income tax: The Trump tax plan amended the state and local income tax (SALT) deduction so that taxpayers can only claim up to $10,000 in combined state and local income, sales and property taxes as an itemized deduction. Taxpayers living in places with high state and local taxes will get disproportionately hit by this change.

Taxpayers using personal exemptions: A personal exemption allowed you to deduct set amounts for each taxpayer and dependent on your tax return, which could have benefitted taxpayers with large families of dependents. This exemption and possible tax benefit for many has now been suspended.

Those without health insurance: The Trump tax plan eliminated the tax penalty you could face if you did not enroll for health insurance under the Affordable Care Act (ACA) and did not qualify for an exemption.

FAQ: Tax filing tips for 2021

Taxes for tax year 2020 are due to the IRS by April 15, 2021. If you need more time to file, you can file Form 4868 by April 15 to receive an automatic six-month extension. However, this does not provide a payment deadline extension if you owe taxes; you will still have to make your tax payment by April 15.

You might have been overpaying or underpaying on your taxes before the tax reform went into effect, which could mean a tax bill or bigger-than-expected tax refund this time around.

To avoid confusion, consult a tax professional and consider adjusting your allowances on your W-4.

If you end up owing taxes, you’ll need to pay your bill by April 15th or contact the IRS to sign up for a payment plan. Late payments will result in penalties and additional fees.

The IRS typically sends out tax refunds within 21 days of receiving your filing. It can take longer on some occasions, depending on your situation. If you file your return electronically, you can check the status of your refund after 24 hours from filing, through the IRS’ Where’s My Refund? tool. If you mail in your return, you can check the status four weeks after mailing. You can also use your smartphone to download the IRS2Go app to check your refund status.

It’s certainly tempting to use the money to book your next much-deserved vacation. But treating yourself isn’t necessarily the best way to spend your tax refund. Instead, consider stashing it away inside a savings vehicle and forgetting you even had extra cash to spend. An easy option is to boost your emergency savings by depositing your refund in a high-yield savings account. That will grow your refund efficiently over time and can save you some financial grief in the future.

A savings account can be easily accessed in case you need the funds in a pinch, unlike with a high-rate certificate of deposit. A CD works better if you need to save towards a longer-term goal, like making a down payment on a house in a few years. Once you make your deposit into a CD, it grows undisturbed for the length of its term. In exchange for leaving your deposit untouched with the bank, you get to grow your CD funds at high interest rates, resulting in some solid savings growth when the term ends.

Other options include using your refund to expand your investment portfolio or placing the funds in an IRA. Investing your refund can be a riskier way to grow your money since your returns depend on the market instead of an APY. And of course, saving in an IRA is a smart way to invest in your retirement future. The IRS even allows you to split your refund between multiple accounts when you sign up for direct deposit. This makes it easy for you to save your refund in various ways.

Do you have a savings goal in mind? Tell us about it!

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How to File Taxes as an Immigrant

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Two recurring themes have dominated the news cycle over the past few years: immigration and taxes. While these may seem like entirely separate issues at first glance, immigrants do pay federal income taxes — and face a variety of unique challenges in the process, including dealing with language barriers and learning to file for the first time.

To help make filing your taxes as an immigrant a little easier, here’s an overview of who needs to file, how to file for the first time and where you can turn for help.

Who files taxes?

Citizens aren’t the only ones who pay taxes in the U.S. Immigrants who are authorized to work in this country are required to pay the same federal and state income taxes that citizens do, and undocumented immigrants pay billions of dollars in taxes each year — often for public benefit programs that they are unable to use.

Filing requirements depend on whether you are considered a nonresident alien or a resident alien.

Resident aliens

A resident alien must meet one of two tests:

  • Green card test. The U.S. Citizenship and Immigration Services issued you an alien registration card, also known as a “green card,” which allows you to permanently live in the U.S. as an immigrant.
  • Substantial presence test. You must be physically present in the U.S. for at least:
    • 31 days during the current year, and
    • 183 days during the three-year period that includes the current year and the two years immediately before that. (You can read more about how days of presence are determined here.)

Resident aliens follow the same filing requirements as U.S. citizens.

Nonresident aliens

If you are not a U.S. citizen and don’t meet either of the tests to be considered a resident alien, you are considered a nonresident alien.

As a nonresident alien, you must file a tax return if you own a business in the U.S. or have U.S. income and did not have enough tax withheld by your employer. You may also want to file an income tax return to receive a refund of tax withheld.

What’s a W-4?

If you work in the U.S., your employer should ask you to complete Form W-4, which is used to determine the correct amount of tax to withhold from your pay.

Form W-4 includes worksheets to help you determine how many “allowances” you should claim. Each allowance reduces the amount held from your paycheck. You get one allowance for yourself, one for your spouse, and one for each dependent you claim on your tax return.

You can complete a new Form W-4 at any time, and it’s a good idea to submit a new one to your employer anytime your tax situation changes, such as if you get married or divorced or have a new baby. Adjusting your withholding can help prevent having too much or too little tax withheld.

Rather than relying on the worksheets included with Form W-4, you may want to use the IRS’s Withholding Calculator.

How to pay U.S. taxes

In some countries, the government withholds tax from your paycheck, and that’s the end of your tax filing requirements. In the U.S., it’s more complicated. Here’s an overview of what you’ll need to file a tax return.


To pay taxes in the U.S., you will either need a Social Security number (SSN) or an individual taxpayer identification number (ITIN).

Noncitizens authorized to work in the U.S. by the Department of Homeland Security can apply for a Social Security number in their home country before coming to the U.S. or by visiting a Social Security office in person. You will need to complete Form SS-5, Application for a Social Security Card, and provide documentation to prove your identity, work-authorized immigration status and age. You can learn more about the acceptable documentation here.

If you are not eligible for an SSN, you can apply for an ITIN by filling out Form W-7, Application for IRS Individual Taxpayer Identification Number and submitting it to the IRS along with documentation proving your identity and foreign status. The Instructions for Form W-7 include a list of acceptable documents and instructions for submitting your application.

Which tax forms to file

The tax forms you’ll use to file your tax return depend on whether you are a resident alien or a nonresident alien.

Resident aliens use the same tax form as citizens: Form 1040, U.S. Individual Income Tax Return. Generally, Form 1040 is due on April 15 of the following year. However, if you are living and working outside of the U.S. on April 15, you are given an automatic extension to June 15. You can request a longer extension, until Oct. 15, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Nonresident aliens file using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Form 1040-NR is also due on April 15 of the following year, but taxpayers who are not living and working in the U.S. on that date have until June 15 to file. You can request an extension to October 15 by submitting Form 4868 by the due date of your return.

Reporting income earned outside the US

Many resident aliens and nonresident aliens continue to receive income from outside of the U.S. even after they begin working in the country. Resident aliens are required to report income from all sources within and outside of the U.S. on their tax returns, whether they are living in the U.S. or abroad.

However, you may qualify to exclude a portion of your foreign earnings from your taxable income — the amount you can exclude changes each year. You can determine your eligibility and the exclusion amount using Form 2555, Foreign Earned Income. You can also use the IRS’s Interactive Tax Assistant Tool to help determine whether the income you earned in a foreign country can be excluded.

What to do if you’re undocumented?

According to the Pew Research Center, there were roughly 10.5 million undocumented immigrants in the U.S in 2017, and 7.6 million of them are a part of the U.S. workforce.

Whether undocumented immigrants work legally under Deferred Action for Childhood Arrivals (DACA) protections or work illegally with falsified or nonexistent documentation, they are required to pay taxes on any income earned in the U.S.

Many undocumented immigrants face barriers to complying with U.S. tax laws due to language barriers, difficulty understanding complex tax laws or fears that the IRS will pass their information along to immigration enforcement.

Later, this article will cover resources where immigrants can find help with tax filing. As for immigration enforcement fears, you generally do not have to fear that the IRS will share your application for an ITIN or tax information with immigration enforcement officials. The IRS is not allowed to release taxpayer information to other government agencies, except for providing information to the Treasury Department for tax compliance investigations or under a court order related to a non-tax criminal investigation.

Benefits of paying taxes

Filing a tax return and paying taxes to the U.S. does not entitle nonresident aliens or undocumented workers to claim Social Security benefits, but there are other benefits to filing tax returns. According to the National Immigration Law Center, paying taxes:

  • Demonstrates compliance with federal tax laws
  • Gives immigrants who want to legalize their immigration status and become a citizen an opportunity to prove they have “good moral character”
  • Document work history and physical presence in the U.S.
  • Claim certain tax benefits, such as the Child Tax Credit
  • Claim insurance premium tax credits for children who are U.S. citizens

Where to find help

The IRS’s Volunteer Income Tax Assistance (VITA) program helps taxpayers who cannot afford traditional tax preparation service, need translation assistance or need help applying for an ITIN. The IRS trains and certifies volunteers to provide free basic tax return assistance to individuals.

You can locate a VITA site by visiting and entering your ZIP code. Before visiting a VITA site, you may want to review Publication 3676-B (available in English and Spanish) to verify the services provided by VITA and check out the IRS’s What to Bring page to ensure you have all of the required documents and information volunteers will need to help prepare your return and apply for an ITIN, if necessary.

If you prefer to handle tax filing on your own, check out our recommendations for tax filing software.

The bottom line

Working through the forms required to apply for an ITIN and prepare a tax return can be daunting, but seeking help and overcoming the barriers to complying with U.S. tax law is important. If you plan to seek citizenship down the road or someday appear in front of an immigration judge, the fact that you’ve dutifully filed income tax returns while you lived and worked in the country can help make a stronger case for you to remain in the country.

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Don’t Use Your Tax Refund as Forced Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Internal Revenue Service IRS building in Washington DC forced savings

Getting a fat tax refund from the IRS may put a big smile on your face. But before you get too excited, heed the words of hip-hop legend the Notorious B.I.G.: mo’ money, mo’ problems.

A big refund check isn’t a sign you’re getting money from Uncle Sam—in fact, quite the opposite. It means that throughout the year, you’ve granted the government an interest-free loan from your paycheck, and now you’re getting the principal back in one lump sum. You’re not making any more money than if you had taken that cash, buried it in your yard and dug it up in April. Thankfully, there’s a better way.

Don’t use the IRS as a forced savings account

Most Americans only think about their federal income tax once a year, ahead of the April 15 tax deadline. But it’s important to understand that you’re paying income taxes with every pay period. For workers receiving wages, state and federal income tax is withheld by employers with each paycheck (It gets even more complicated if you’re self-employed or a freelancer; you’ll usually have to pay an estimated quarterly tax).

Your employer calculates how much of your paycheck to withhold, ensuring you pay your annual tax bill over time, based on the information you filled out on your W-4 when you start a job. Many people fill out the form without a second thought, but it has an impact on your financial life because it determines the size of your withholding.

On your W-4, you claim a certain number of tax allowances. The more allowances you claim, the less money is withheld from your paycheck. The general rule is that you can claim one allowance for the following:

  • Yourself
  • Your spouse
  • Any dependents you can claim (this will usually be your children, but can be anyone who qualifies under IRS rules)

This list above provides a good baseline for claiming allowances, but maxing out your claims isn’t as simple as taking a tally of everyone at the dinner table.

Claim the right amount of allowances to avoid overpaying

When claiming allowances on your W-4, your goal should be to land on the amount that matches your federal tax liability—how much you owe the government in taxes—as closely as possible. If you do it right, your tax liability should be divvied up precisely and paid off via withholding in each pay period. Get it right, and you won’t receive a tax refund.

How do you determine the correct amount of allowances to claim to avoid the ritual of forced savings and refund checks? The IRS provides personal worksheets with the W-4 form that can help you calculate the maximum amount of allowances you’re entitled to.

Answer the following questions in order to figure out how many allowances you should claim.

Should I claim the Child Tax Credit?

As alluded to earlier, claiming just one allowance for each of your children may mean you aren’t taking all the allowances you could. If you’re claiming a tax credit for each child, the number of allowances you claim for each child depends on your total income, and if you’re filing as a single person or married filing jointly.

Filing Single Married Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351


$71,201 to $179,050 $103,351 to $345,850


$179,051 to $200,000 $345,851 to $400,000


Higher than $200,000Higher than $400,000


You should also take into account tax credits you will claim for eligible dependents who aren’t your children, which affects the number of allowances you can claim.

Filing Single Married Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351


$71,201 to $179,050$103,351 to $345,8501 for every 2 dependents ( if you only had one dependent, you would claim 0 allowances. If you had 2 dependents, you would claim 1 allowance)
Higher than $179,050Higher than $345,850


Do I have more than one job? Does my spouse work?

If you’ve fully embraced the cult of the side hustle — willingly or not — or if your spouse also works, and the combined income from all of these jobs exceeds $53,000, you may want to claim additional allowances. The Two Earners/Multiple Jobs worksheet that comes with the W-4 walks you through the many allowances you could claim, but in general the number of allowances you can claim is based on the wages you earn from your lowest-paying job.

Am I claiming itemized deductions?

The Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump at the end of 2017 changed the calculus for many taxpayers who normally devote hours to claiming itemized deductions. “There will be a lot of disconnect this year for people who have relied on itemized deductions that are no longer deductible,” said Michael Goldfine, CPA based out of New York, NY.

The changes to the tax code in 2017 nearly doubled the standard deduction, from $6,350 to $12,000 for single filers (and from $12,700 to $24,000 for married couples filing jointly). This means it usually makes more financial sense to simply claim the standard deduction. If you do that, you wouldn’t claim an additional allowance on your W-4.

However, if you believe the value of itemized deductions you can claim exceeds what you would get with the standard deduction, then the amount greater than the standard deduction figures in to whether or not you should take another allowance.

What other deductions or adjustments should I claim?

You’ll also want to think long and hard about any income you’ve earned that’s not from wages and isn’t subject to federal withholding. Interest earned from bank accounts or dividend payments from stocks, for example, could all contribute to how many allowances you can claim. By filling out the Deductions, Adjustments and Additional Income worksheet with Form W-4, you can estimate the number of allowances this income entitles you to claim.

Don’t claim more allowances than you’re owed

While withholding too much and not claiming as many allowances as your circumstances allow gives the federal government an interest free loan, the opposite — claiming too many allowances and not withholding enough — isn’t ideal either.

If your employer doesn’t withhold enough money from your wages, you can expect to receive a bill instead of a refund check. And if you owe the government more than $1,000, you may also have to pay a penalty fee (which the IRS will happily calculate for you). This is especially true if this isn’t the first time you’ve come up short with Uncle Sam.

“If you owed money last year, and you owe money again this year, you’re going to get underpayment penalties,” said George Dimov, CPA at Dimov Tax Associates in New York City. “That applies to the IRS and to the states. In that case, if you don’t want a penalty, you should overpay.”

The amount the IRS will charge you varies on your individual circumstances, but according to Dimov it’s generally 2% to 3% of the amount you still owe the government — “the IRS has its own proprietary formula to estimate [the penalty],” he added.

In general, you won’t have to pay a penalty if:

  • The amount you owe the IRS is less than $1,000
  • You’ve paid 90% of your tax liability (the IRS lowered this threshold to 80% for the 2018 tax year only to take into consideration how changes to the tax law could confuse tax filers)
  • You paid 100% of your tax liability in the previous tax year

While the fact that you have $1,000 of leeway before incurring an underpayment penalty may tempt you to err on the side of claiming more allowances than you’re strictly entitled, keep in mind one allowance generally equals $4,200. One of the best ways to avoid claiming too many allowances is to only claim those the IRS says you can, per the worksheets included with form W-4.

How Americans are spending their forced savings

Now that you know how to dial in the proper amount of allowances to claim and no longer give the federal government more money than it’s owed throughout the year, you can start putting your income to better use.

The average size of a tax refund so far for 2018 filings is $2,873. According to a National Retail Federation survey of tax filers, 49% of those expecting a refund this year plan on putting that refund money into some sort of savings account or product.

That’s great, except they’ve already lost out on a year’s worth of interest because of overpaying Uncle Sam with each paycheck. If they had claimed more allowances and placed the extra money from their paycheck into a common savings product, here’s how much they would have earned via interest.

 1-Year CDSavings AccountTax Refund
Interest Earned1.373%*0.272%*0
Money earned after a year$39.72$7.83$0

*APY for the 1-year CD and savings account are both based on national averages according to data from as of April 2019; MagnifyMoney and are both owned by LendingTree. Money earned after a year calculated assuming a deposit of $2,873 into either product.

Granted, the money earned from either a CD or a savings account won’t bump you into a higher tax bracket, but think of it this way — would you put your money in an account that offered zero interest? Because that’s what you’re doing when you don’t claim the proper amount of allowances on your W-4 and let the government hold on to your hard-earned cash for a year before paying it back in a big refund check.

The bottom line on your tax refund

Telling people they should feel bad about receiving a big tax refund ranks just above telling children Santa is a lie. And just like believing in Santa, getting a refund check for thousands of dollars might just give some people a warm, fuzzy feeling that justifies the cost.

However, the view through the cold, calculating eyes of a personal finance expert suggests that getting a large tax refund is a lost opportunity to invest money where it earns interest, such as a savings account or CD. You have to decide whether the excitement of that tax refund is worth the money you’re losing out on.