One of the first steps that all foreigners need to take in order to partake in the American business market in any way is to get an ITIN. But what is ITIN and how can a nonresident even get one?
Today, we’re answering these and many other questions, such as:
- Why do nonresidents even need an ITIN?
- What’s the process of getting an ITIN?
- What is ITIN’s purpose?
- What is the difference between ITIN and SSN?
- What are the advantages and disadvantages of having an ITIN?
What Is ITIN?
ITIN stands for Individual Taxpayer Identification Number and it’s basically a number that the IRS issues to every individual taxpayer who is lawfully in the US, including:
- Nonresidents who are legally residing in the US and need to file a tax return due to the number of days spent in the US,
- Nonresidents who are legally residing in the US and need to file a tax return due to them owning a business,
- Resident aliens, or
- Dependents of nonresidents or resident aliens.
This number is a substitute for a Social Security Number and, just like an SSN, it has the same, 9-digit form. However, ITIN is easily distinguishable from an SSN, because it always starts with a “9.”
ITIN is a tax-processing number. The Internal Revenue Service has been issuing it to nonresidents since 1996 to ensure that every person in the US contributes to the economy by paying taxes. The ITIN was necessary for nonresidents and undocumented immigrants, because, until 1996, the IRS didn’t have a way to track them and their taxes.
Now it has. The ITIN allows you to pay taxes, regardless of your immigration status or the fact that you don’t have a Social Security Number.
Because foreigners often have a lot of questions about ITIN (and the process of getting one), we decided to try to answer most of them in the following chapters.
What Do You Need an ITIN for?
If you’re a nonresident looking to invest in US real estate or participate in the US business market in any way (by opening an American LLC, for example), you will need an ITIN.
However, it’s important to note that, although you can get an ITIN even though you aren’t a citizen of the US (or a Green Card holder), the ITIN doesn’t resolve your legal status in the US. What’s more, it in no way contributes to you getting your legal status resolved. So, if that’s something you’re aiming for, there are many other steps that you’ll need to take in order to get there, and getting an ITIN isn’t one of them.
What ITIN is good for, on the other hand, is the following:
- Filing the state and federal tax requirements that are made by the IRS, and
- Presenting a federal tax ID (when necessary).
In the broadest sense, having an ITIN also gives you access to the US payment systems (of which we’ll talk more later in the article), allows you to file taxes through an American LLC, and allows you to take advantage of specific deductibles and tax benefits.
Do All Nonresidents Need to Have an ITIN?
Here at Nonresident Investor, our clients often ask us whether it’s necessary for every nonresident to have an ITIN.
The answer is — no. If you’re just spending time in the US, and have no taxes to file, you don’t need an ITIN.
However, if you’re a nonresident, a nonresident alien who needs to pay taxes, or a dependant of either of the previous two, then you will need an ITIN. All nonresidents (or dependants) who aren’t eligible for a Social Security Number, have to have ITINs.
Our clients often ask us why dependants have to have an ITIN when it’s not them who are filing tax returns. Well, if you want to declare someone a dependant on your US taxes, that person has to be visible to the IRS. And, if they don’t have a Social Security Number, the only way to make them visible is with an ITIN.
So, if you, for example, have multiple people who depend on your income (otherwise known as dependants), then you’ll need to get an ITIN for each of them, in order to declare them as dependants and lower your taxes.
Is ITIN Different from a Social Security Number?
Although they look quite alike, ITIN and SSN aren’t the same. While a Social Security Number is issued for the purposes of identification (to citizens and authorized non-citizens in the States) and opens the door to its carriers for many opportunities and benefits, the ITIN is issued for tax purposes only.
Furthermore, having an ITIN doesn’t authorize you to work or reside in the US. Aside from that, it also doesn’t allow you to:
- Obtain legal status, as it has no inference when it comes to your immigration status,
- Claim Social Security benefits, or
- Claim the Earned Income credit.
Another major difference between ITINs and SSNs is that ITINs can expire. While getting a Social Security Number is a “one and done” type of deal, an ITIN is only valid for 3 years. More precisely, you need to file your taxes by filing your 1040NR form every year. If you don’t, after 3 years, your ITIN will expire and you’ll have to go through the whole process of obtaining one again.
Social Security Numbers, on the other hand, can’t expire, even if the SSN holder doesn’t file taxes at all (which we don’t recommend).
What About EIN? Are ITIN and EIN the Same?
Although there’s plenty of confusion when it comes to the differences between ITINs and SSNs, there’s even more when it comes to the difference between ITINs and EINs. If you are interested in learning what is an EIN Number used for, we wrote a detailed post about it.
In the broadest terms, an ITIN is tied to you, a physical person, while an EIN is tied to a business. Although both numbers serve as tax identification numbers, ITINs are used to file personal taxes while EINs are used to file business taxes. What’s more, EINs identify businesses to the IRS, the banks, and other businesses, while ITINS are used as federal IDs by individuals.
Another point of confusion is that you can have either an ITIN or an EIN. This also isn’t correct. You can have both numbers, as they are independent from each other.
So, for example, if you’re looking to open an LLC in the States, as one of the steps, you’ll file a request with the IRS to get your own EIN. You can do so even if you already have an ITIN.
In fact, in some states (such as Delaware), you’ll need to have an ITIN before filing the necessary forms to open your LLC and get an EIN. However, that’s not a necessity in every state, so make sure to check the rules before embarking on that particular adventure.
Related: Can Foreigners Form LLCs in the US
The Advantages of Having an ITIN
As mentioned, an ITIN is a necessity but it also offers quite a few advantages to nonresidents.
Let’s take a look at the most important ones.
You Can Pay Your Taxes
Of course, the main purpose of an ITIN is that it allows you to file your tax returns. If you’re a subject to US income tax (for example, of you own property in the US that you rent out and receive rental income) or a spouse/partner of a US citizen, then you’ll need to file your tax returns every year.
You Can Establish Proof of Residency
Having an ITIN allows you to prove how long you’ve been in the States. Of course, this isn’t of particular importance to nonresident investors who only plan to hop to the US, purchase a real estate property, and hop back to their country of origin.
However, if you plan on living (at least partially) in the States, then sooner or later, you’ll have to prove how long you’ve been a resident for (when applying for another visa, for example, or even trying to get a Green Card). Having an established history thanks to the ITIN (and yearly tax filing) will come in handy there.
You Can Open a Personal US Bank Account
While having an EIN (thanks to your US LLC) allows you to open a business bank account, having an ITIN goes a long way when it comes to opening a personal bank account.
In general, opening a bank account in the US isn’t as easy for nonresidents as it is for citizens. Having an ITIN instead of an SSN signals your recent residency to the banks. Some banks might not find you as reliable as they would a regular citizens and deny you services due to that.
However, there are plenty of banks in the US that are willing to work with nonresidnets. Still, in order to get access to them (and other US payment systems such as PayPal), you will need an ITIN.
You Can Build a Credit Score
One of the major advantages of being an ITIN holder is that it gives you the opportunity to build your credit score. As a newcomer to the US, you don’t have a credit score.
That’s quite unfortunate, given that you need a high (or even excellent) credit score — which is a numerical value that represents your financial liquidity — in order to be considered for a loan. Banks use credits scores to figure out how trustworthy you are (and, more importantly, whether you’ll be able to pay the loan back).
Building a credit score starts with opening a personal bank account (as mentioned earlier) and then using it wisely (for example, getting a US credit card and using it to build credit).
You Can Apply for a Loan
Obtaining a bank account and establishing a good credit score allows you to be considered for a loan. Without an ITIN, none of that is possible.
The Disadvantages of Having an ITIN
Having an ITIN doesn’t have disadvantages per se but it does have some limitations.
The first and most important limitation is that an ITIN is a federal tax ID but it can’t be used for any other identification purposes. So, if you’re a nonresident investor and you get stopped on the street and asked to identify yourself, you won’t show your ITIN. ITIN is only valid to the IRS.
Aside from that, as mentioned, ITIN also has the following limitations:
- Having an ITIN doesn’t make you eligible for Social Security benefits as having one doesn’t automatically make you a member of the Social Security system.
- An ITIN doesn’t make you eligible (nor can you use it to apply) for the Earned Income credit. This credit allows low and middle-income families get a tax break. No matter how low your income, you can’t apply for that, as that’s a tax benefit only available to US citizens.
- You can’t work in the US. “Work” is any activity for which you earn a wage or any other monetary compensation from an employee (be it a physical person or a company). So, if you have your own LLC company that earns an income, you aren’t technically “working,” at least when the official IRS definition of work is concerned.
How to Get an ITIN as a Nonresident
Althoguh the US bureaucracy seems complicated to many (becuase in most cases it is), getting an ITIN isn’t that hard.
To get an ITIN, you will need:
- A W-7 form that’s been filled out,
- Documentation that proves your either a nonresident or a resident alien, and
- Documentation that proves your identity (usually a passport).
There are 3 different ways you can file for an ITIN:
- By mailing the documents to the IRS,
- In person, or
- Through an acceptance agent.
If you’re filing for an ITIN by mail, you’ll need to either send in your original documents (and then be without them while you wait for the IRS to process your application and return them to you) or send certified copies. The reason for this is that the IRS takes identification very seriously, so they don’t leave anything to chance.
If you opt to go via an acceptance agent, then you’ll be able to provide your documents to them in person and you won’t have to certify them. Acceptance agents are agencies that have been certified by the IRS to handle ITIN applications remotely for them. Those agencies guarantee that your papers are valid (and that your identity has been vetted), which is why you don’t need to send in certified copies of everything.
Need to Get an ITIN? The NRI Team Can Help
Here at the Nonresident Investor, we’ve been through the process of obtaining an ITIN dozens of time. What’s more, over the years, we’ve established an excellent professional relationship with multiple acceptance agents, which is why we can help you get an ITIN without much hassle. No matter where you’re from, the NRI team can help you get an American ITIN.
Our team includes a vast number of experts and people who specialize in working with nonresident investors, which is why we can offer you the best assistance there is.
Our experts will consult with you and offer you advice on which documents you’ll need and in which way you should fill them out in order to get an ITIN. Then, our accountants will audit your paperwork and send it to a trusted, certified acceptance agent, who will then audit it and send it over to the IRS. Before you know it, you’ll have your ITIN and you’ll be able to file your taxes in the US!
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