The Donald Trump administration has proposed new rules that would restrict undocumented immigrants and certain other foreign nationals from receiving the refundable portions of four federal tax credits
in the United States.
The regulations, proposed by the US Treasury Department and the Internal Revenue Service (IRS), would apply provisions of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) to the refundable portions of the adoption tax credit, child tax credit, American Opportunity Tax Credit and Earned Income Tax Credit.
The Treasury Department has said the change is intended to ensure that federal taxpayer-funded benefits are paid only to those who meet the legal eligibility requirements.
The proposal could also be relevant for Indian nationals working in the US on H-1B visas, since eligibility would depend on whether a taxpayer falls within the categories recognised as a “qualified alien” under PRWORA.
Who Would Be Eligible For The Refundable Tax Credits?
The proposed rules would require a taxpayer to be a US citizen, US national or qualified alien when filing the federal income tax return on which one of the affected credits is first claimed.
Those seeking the refundable portion would also have to certify, under penalty of perjury, that they are eligible for it.
The Treasury Department’s move follows an opinion from the US Justice Department’s Office of Legal Counsel, which found that the refunded portions of the four tax credits qualify as federal public benefits under PRWORA.
The restriction would apply only to the part of a refundable tax credit that exceeds a taxpayer’s income tax liability for that year. A taxpayer who is ineligible for the refunded amount could still claim any portion of the credit for which they otherwise qualify to offset their income tax liability.
Why H-1B Workers Could Be Affected
For Indian H-1B workers, the key part of the proposal is its definition of who counts as a qualified alien.
The proposed regulations rely on the meaning provided under PRWORA, which includes lawful permanent residents, refugees, people granted asylum and certain other categories recognised under US law.
H-1B visa holders are not listed in the proposal among the categories specifically identified as qualified aliens. That, however, does not mean every H-1B worker would automatically lose access to the tax credits altogether.
The proposed change deals specifically with the refundable component of the four credits, rather than imposing a blanket bar on H-1B holders claiming any tax benefit linked to them.
Which Four Tax Credits Are Covered?
The Trump administration’s proposal covers the refundable portions of four individual federal income tax credits: the adoption tax credit, child tax credit, American Opportunity Tax Credit and Earned Income Tax Credit.
Each would be subject to the proposed PRWORA eligibility requirement when it comes to the portion that can be paid back to the taxpayer as a refund.
Are The Rules In Force Yet?
No. The regulations have only been proposed and have not yet taken effect.
The Treasury Department and the IRS are currently seeking public comments, along with requests for a public hearing, before the rules are finalised.
If adopted, the regulations would apply to tax years ending on or after the date on which the final rules are published in the Federal Register.
