Treasury rule on 4 tax credits could strip refunds from millions

The Treasury and IRS proposed rules Wednesday that would classify the refundable portions of four major tax credits as federal public benefits, potentially disqualifying millions of noncitizens with work authorization from receiving those payments.

"Under President Trump, the days of illegal aliens collecting taxpayer-funded benefits are over," Treasury Secretary Scott Bessent said in a press release. "American taxpayers should not be forced to foot the bill for benefits going to those who are barred by law from receiving them."

The proposal, unveiled August 19, would apply to the adoption tax credit, child tax credit, American Opportunity tax credit, and earned income tax credit. Taxpayers claiming the refunded portion must be U.S. citizens, U.S. nationals, or qualified aliens — including lawful permanent residents, asylees, and refugees — and must declare eligibility under penalty of perjury on their tax return. On joint returns, only one spouse needs to meet the standard.

Tax experts estimate up to "several million people" could be affected, with the greatest impact on lower-income households who typically receive most of these credits as refunds rather than tax offsets. The rules would take effect for tax years ending on or after the date the regulations are published in final form, meaning 2026 tax returns filed next year if finalized this year.

Who Loses Access

The affected groups include people with pending asylum applications, those with Temporary Protected Status, and Deferred Action for Childhood Arrivals recipients, said Margot Crandall-Hollick, a principal research associate at the Urban-Brookings Tax Policy Center. In 2023, there were 2.6 million asylum applicants, 650,000 people with Temporary Protected Status, and 600,000 enrolled in DACA, according to an analysis by the Pew Research Center. Those numbers have likely declined since then as the Trump administration has intensified immigration enforcement, including a Supreme Court ruling in June that cleared the way to strip hundreds of thousands of Haitian and Syrian immigrants of TPS protections.

The proposal follows a legal analysis by the Department of Justice's Office of Legal Counsel, which concluded that the refunded portions of the affected credits constitute federal public benefits under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. That law restricts federal public benefits to U.S. citizens, U.S. nationals, and qualified aliens.

Only the refunded portion of the affected credits — defined as the total that exceeds a taxpayer's income tax liability for the year — would be treated as a federal public benefit. Noncitizens could still claim the nonrefundable portion to reduce their tax liability to zero, but they would no longer receive cash refunds.

The policy would have the greatest impact on lower-income households, Crandall-Hollick said. These households generally have minimal tax liability, so most of the credit value comes as a refund. For a family claiming the earned income tax credit, the difference between a refund and a tax offset can amount to thousands of dollars annually.

The proposal is part of a broader effort to restrict immigrants' access to public benefits, said Mark Greenberg, an immigration expert at the Brookings Institution. Republicans' "big beautiful bill" signed into law last year already narrowed eligibility for programs including Medicaid, Medicare, Affordable Care Act premium tax credits, the child tax credit, and the Supplemental Nutrition Assistance Program. The 1996 welfare reform law that underpins the new proposal was itself a landmark shift in federal policy, establishing the framework that now governs which noncitizens can access public benefits.

"Refundable tax credits, like the Earned Income Tax Credit, were enacted to help low-to-middle-income American families and workers receive critical financial support," said IRS Chief Executive Officer Frank J. Bisignano. "Today's proposed regulations ensure that federally funded benefits are reserved for eligible taxpayers and protect the integrity of every taxpayer dollar."

The Treasury and IRS will accept public comments for 45 days, with a public hearing scheduled for October 14. The agencies will consider comments before issuing a final rule. If the rules are finalized this year, they would apply to 2026 tax returns filed next year. Readers should verify details against the latest official Treasury and IRS announcements, as proposed regulations may change during the comment period.

This article is for informational reference only and does not constitute professional advice.