Trump tightens tax credit rules: What Indian H-1B workers could lose

The Trump administration has proposed new rules that could restrict access to the refundable portions of four federal tax credits for undocumented immigrants and certain other foreign nationals who do not meet the immigration-status requirements under US law.

The proposal could have implications for some Indian H-1B workers, although it does not amount to a blanket ban on H-1B holders claiming the four credits.

The US Treasury Department and Internal Revenue Service have proposed regulations that would apply immigration eligibility requirements under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) to the refundable portions of four federal tax credits.

The proposal concerns the portion of a tax credit that can be paid to a taxpayer as a refund when it exceeds their federal income tax liability.

The four credits covered are the:

• Adoption tax credit
• Child tax credit
• American Opportunity Tax Credit
• Earned Income Tax Credit

What is the proposed change?

Under the proposed regulations, a person would have to be a US citizen, US national or qualified alien when filing the federal income tax return on which they first claim one of the affected credits to receive its refundable portion.

Applicants would also have to certify under penalty of perjury that they meet the eligibility requirements.

The Treasury Department said the proposal is intended to ensure that taxpayer-funded federal benefits are provided only to people who meet the legal requirements.

Why does this matter for Indian H-1B workers?

The proposal could raise questions for Indian nationals working in the US on H-1B visas because the rules use the definition of a "qualified alien" under PRWORA.

The categories identified under PRWORA include lawful permanent residents, refugees, people granted asylum and certain other immigration categories.

H-1B visa status is not listed among the categories specifically identified as qualified aliens in the proposal.

However, this does not mean that every H-1B worker would automatically lose all access to these tax credits.

The proposed restrictions specifically concern the refundable portion of the four credits. A taxpayer who is not eligible for the refundable amount could still potentially claim the portion of a credit that is otherwise available to offset their federal income tax liability.

What does ‘refundable’ mean?

A refundable tax credit can provide money back to a taxpayer when the credit is greater than the amount of federal income tax they owe.

For example, if a taxpayer has a qualifying refundable credit worth more than their tax liability, the excess can potentially be paid to them as a refund.

The proposed rules would target this excess amount.

They would not automatically eliminate every tax benefit associated with the four credits.

Which tax credits are affected?

The proposal covers the refundable portions of four individual federal income tax credits:

1. Adoption tax credit

This credit provides tax relief for eligible adoption-related expenses.

2. Child tax credit

This provides tax benefits to eligible taxpayers with qualifying children, with a refundable component subject to separate rules.

3. American Opportunity Tax Credit

This provides eligible taxpayers with a tax benefit for certain higher-education expenses and includes a refundable component.

4. Earned Income Tax Credit

The EITC provides tax relief to eligible lower- and moderate-income workers and families and can result in a refund.

Are the new rules already in force?

No.

The regulations are currently only a proposal.

The Treasury Department and IRS are seeking public comments and requests for a public hearing before deciding whether to finalise the rules.

If adopted, the regulations would apply to tax years ending on or after the date the final regulations are published in the Federal Register.

Why did the Trump administration propose the change?

The Treasury Department's proposal follows an opinion from the US Justice Department's Office of Legal Counsel, which concluded that the refundable portions of the four tax credits qualify as federal public benefits under PRWORA.

The administration is therefore seeking to apply PRWORA's immigration eligibility requirements to those refundable amounts.

What should H-1B workers understand?

The key point for Indian H-1B workers is that the proposal is not a blanket cancellation of these tax credits for everyone holding an H-1B visa.

Instead, the proposed rule creates an immigration-status requirement for receiving the refundable portion.

The precise impact on an individual taxpayer would depend on their immigration status, the credit being claimed, their tax liability and whether the final regulations are adopted in their current form.

Analysis

The proposal is significant for Indian professionals because India is one of the largest sources of H-1B workers in the United States.

However, headlines suggesting that the Trump administration is simply "ending tax credits for H-1B workers" would be misleading.

The proposal is narrower. It focuses on the refundable component of four specific credits and links eligibility to the definition of a qualified alien under PRWORA.

The distinction between a tax credit and a refundable tax credit is therefore important. Someone who does not qualify for the refundable portion could still potentially receive a non-refundable portion that reduces their tax liability, if they otherwise meet the relevant requirements.

The rules are also not final yet. Public comments and a potential hearing will take place before the Treasury Department and IRS determine whether to issue final regulations.

For Indian H-1B workers, the main issue to watch is therefore whether the final regulations retain the proposed definition and how the government ultimately applies the qualified-alien requirement to different immigration statuses.