F-1 to H-1B Shift Creates Tax Deduction Issues in One Big Beautiful Bill

(UNITED STATES) — As thousands of international professionals move from F-1 to H-1B, a complex mix of residency status, treaty claims, and new deductions can dramatically alter the 2025–2026 tax picture and the cost/feasibility of staying in the U.S. through the change.

1) Overview: why F-1 to H-1B can flip your tax results overnight

Plan for two systems to collide. Immigration status decides whether you can work. Tax residency decides how the IRS taxes you.

A common pattern looks simple on paper: you work on F-1 OPT, then switch to H-1B around October 1. Taxes rarely stay simple. A mid-year change can push you into one of three buckets for the tax year:

1. Nonresident alien (often during F-1 years, depending on your timeline)
2. Resident alien (often later, once you meet IRS residency tests)
3. Dual-Status Alien (split-year treatment when your status and tax residency change mid-year)

That split-year outcome is where the “tax deduction mess” shows up. Deductions can change. Filing positions can change. Treaty benefits can change.

Indian nationals face a specific flashpoint. Many F-1 students rely on Article 21 treaty benefits under the U.S.-India tax treaty to claim a standard deduction (often cited around $15,750 for 2025). After an F-1 to H-1B switch, you may not fit the same treaty “student” facts for the whole year. Dual-status rules can also limit deductions that you expected to keep.

Immigration-side choices can add another layer. The decision between H-1B change of status inside the U.S. versus consular processing abroad may affect whether a large new H-1B filing fee applies. That timing choice can also change how many people end up with dual-status tax years.

Expect to learn three things in this guide:

• What USCIS changed, and when those changes take effect
• Which tax forms often appear in F-1 to H-1B years, and why
• How to avoid the filing mistakes that can lead to amended returns, penalties, or a surprise bill

2) Official statements and policy clarifications you should factor into planning

USCIS and DHS updates did not rewrite tax law. They did change how many people will try to remain in the U.S. and file an H-1B as a change of status. That shift matters because it increases the number of split-year tax situations.

One key policy thread is USCIS’s move away from pure randomness in selection. USCIS Spokesman Matthew Tragesser said on December 23, 2025:

“The existing random selection process of H-1B registrations was exploited and abused by U.S. employers who were primarily seeking to import foreign workers at lower wages than they would pay American workers. The new weighted selection will better serve Congress’ intent for the H-1B program. we will continue to demand more from both employers and aliens so as not to undercut American workers and to put America first.”

USCIS set February 27, 2026 as the effective date for the weighted H-1B selection process. A new selection method can change behavior even before it starts. Employers may push earlier planning. Employees may avoid travel. Paperwork gets compressed.

A second policy thread is the fee shock. A September 19 Presidential Proclamation introduced a $100,000 H-1B filing fee in a specific scenario. USCIS then clarified the scope on October 20, 2025 : the $100,000 H-1B fee applies to certain initial petitions filed for processing at U.S. consulates abroad, but does not apply to people already in the United States who file for H-1B change of status (such as F-1 to H-1B).

That carve-out can shape budgeting and tactics:

• Consular processing may trigger the large fee, depending on how the case is filed and processed.
• Change of status filings inside the U.S. typically avoid the $100,000 fee under the October 20, 2025 clarification.
• Employers may prefer in-country change of status where possible, which can create more dual-status tax years.

Keep your timeline written down. Dates drive everything.

3) The tax deduction mess: what actually breaks in a dual-status year

Start with a basic idea. IRS tax residency is not the same as immigration status. Many F-1 students are treated as nonresidents for a period, then later become residents under IRS tests. H-1B workers are often residents for tax purposes once they meet the tests, but the transition year is the trap.

Step 1: Identify whether you may be a Dual-Status Alien

A Dual-Status Alien year means you are taxed as:

• Nonresident for part of the year, and
• Resident for the rest

An October 1 switch is common, but the tax result depends on days of presence and your individual history. The label matters because dual-status filing rules can restrict deductions and credits.

Step 2: Treaties can help, but they can also collide with dual-status limits

For Indian nationals, Article 21 treaty benefits are often cited as allowing a standard deduction while in student status. The conflict shows up when:

• Part of your year fits the “student” treaty facts, and
• Part of your year is H-1B employment

Dual-status rules can block the standard deduction in many cases. That is why some filers feel like the standard deduction was “taken away” after the switch. The treaty position may still matter, but it must match the facts and the filing posture.

Step 3: Layer in the One Big Beautiful Bill deductions

The One Big Beautiful Bill created or changed deductions that many new H-1B workers expected to claim right away. Eligibility can depend on whether you are filing as a resident, nonresident, or dual-status.

Here are the headline items people ask about:

• No Tax on Overtime: deduction up to 12,500 for qualified overtime compensation
• SALT: cap increased to 40,000
• Student loan interest: 2,500 above-the-line deduction

Your residency posture may affect whether you can claim these at all, and how they calculate. Dual-status rules can also limit what feels “automatic” on a standard resident return.

⚠️ Misclassifying residency or misapplying treaty benefits during a dual-status year can trigger amended returns and penalties; verify guidance with IRS and USCIS materials.

4) Why this matters: compliance risk, real money, and incentives created by USCIS fee structures

Treat your tax return as part of your compliance record. USCIS decisions can involve discretion, and government agencies can review consistency across filings.

Compliance issues often begin with one bad assumption:

• “I stayed in the U.S., so I’m a resident for the whole year.”
• “I’m Indian, so I always get the standard deduction under Article 21.”
• “My payroll already shows everything needed for new deductions.”

Small errors can snowball. A corrected residency classification can force you to amend. Treaty claims sometimes require disclosures. Missing wage detail can block a deduction you planned on.

Money is the other driver. People report unexpected balances due in the $3,000 to $7,000 range when the standard deduction or treaty treatment was applied incorrectly in a dual-status year. Your number could be very different. Still, the direction of risk is clear.

USCIS fee structures also shape behavior. Because the $100,000 H-1B filing fee is tied to consular scenarios, and change of status is carved out under the October 20, 2025 clarification, more candidates may try to remain in the U.S. for F-1 to H-1B change of status. That choice increases the count of split-year tax returns.

5) What to do next: a practical checklist for individuals and employers

Action beats guessing. Use a written timeline and document your positions.

For individuals (especially if Article 21 treaty benefits were in play)

1. Build your date file: entry/exit history, F-1/OPT dates, H-1B start date, and any travel.
2. Decide your likely residency posture: nonresident, resident, or Dual-Status Alien.
3. Treat treaty claims as a legal position: match facts to Article 21 treaty benefits, and document why it applies for the period claimed.
4. Confirm which deductions are realistic under your posture: standard deduction expectations, No Tax on Overtime, SALT, and student loan interest.
5. Attach the right disclosures when required: Form 1040-NR and Form 8833 are common in these stories, but the right mix depends on your facts.

For employers and HR/payroll teams

Clean reporting decides whether employees can claim new deductions. The No Tax on Overtime deduction depends on identifying qualified overtime compensation. That often means:

• Capturing premium overtime in payroll systems, and
• Reporting it clearly on W-2s so employees can support the claim

Selection rule changes can also increase last-minute documentation needs. With the weighted selection effective February 27, 2026, employees may rush to avoid gaps. Payroll and immigration teams should coordinate dates and job details.

✅ Consult an international tax CPA to map Form 1040-NR, Form 8833, and potential dual-status elections to your exact timeline (F-1 to H-1B, mid-year switch).

6) Official sources and where to read more

Use agency pages for the current text, not secondhand screenshots.

• USCIS H-1B updates and announcements: USCIS newsroom—DHS changes process for awarding H-1B work visas
• USCIS guidance tied to H-1B fees: USCIS alerts—updated guidance on new H-1B visa filing fee
• USCIS filing fees (including schedules): USCIS Form G-1055
• IRS international taxpayer residency and H-1B tax overview: IRS—Taxation of alien individuals by immigration status (H-1B)

Cross-check in two passes. First, match your residency posture to IRS instructions. Next, keep copies of USCIS guidance you relied on, including the September 19 fee proclamation context and the October 20, 2025 clarification, so your tax and immigration records tell the same story.

This article discusses tax and immigration matters that can affect individual filers differently based on circumstances. The information provided does not constitute legal or tax advice.