The Trump administration is moving to block undocumented immigrants and other non-qualified aliens from receiving the refunded portions of four federal tax credits, under proposed rules issued by the US Treasury Department and Internal Revenue Service.
The proposal would apply the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, or PRWORA, to the refunded portions of the adoption tax credit, child tax credit, American Opportunity Tax Credit and Earned Income Tax Credit. Treasury said the move is aimed at ensuring taxpayer-funded benefits go to people who are legally eligible to receive them.
What are the new Trump tax credit rules?
Under the proposed regulations, a taxpayer would have to be a US citizen, US national or qualified alien on the date they file the federal income tax return first claiming one of the affected credits to receive its refunded portion.
The taxpayer would also have to declare, under penalty of perjury, that they are eligible to receive the refunded portion.
Treasury said the proposal follows legal analysis from the Justice Department's Office of Legal Counsel that concluded the refunded portions of the affected credits are federal public benefits under PRWORA.
The proposal applies specifically to the refunded portion of the credits. That is the amount of the affected refundable credits that exceeds the taxpayer's income tax liability for the tax year.
A taxpayer who does not qualify for the refunded portion could still claim any part of an affected credit for which they otherwise qualify that generally offsets their income tax liability, according to the proposed regulations.
What does this mean for Indian H-1B workers?
The proposed rules could raise questions for Indian H-1B workers because the eligibility standard for the refunded portion is tied to the immigration categories covered by PRWORA.
The proposal states that "qualified alien" has the same meaning as under PRWORA. The statute includes categories such as lawful permanent residents, refugees and people granted asylum, along with certain other groups specified by law.
The proposed regulations do not list H-1B status as a category of "qualified alien." However, the Treasury proposal is not a blanket rule saying that every H-1B worker will lose tax credits. The specific issue addressed by the proposal is eligibility for the refunded portion of the four affected credits.
Which tax credits are affected?
The proposed rules cover four refundable individual income tax credits:
- Adoption tax credit
- Child tax credit
- American Opportunity Tax Credit
- Earned Income Tax Credit
When will the new rules take effect?
The rules are proposed regulations, not final regulations.
Treasury and the IRS are seeking public comments and requests for a public hearing on the proposal. The proposed regulations state that they would apply to tax years ending on or after the date the final regulations are published in the Federal Register.