The Treasury Department and the Internal Revenue Service have proposed a new regulation that would limit who can receive the refunded portion of four federal tax credits, applying a citizenship and immigration status test that has not been enforced this way before. The rule targets the cash-back piece of the Adoption Tax Credit, the Child Tax Credit, the American Opportunity Tax Credit and the Earned Income Tax Credit — the part of each credit that still pays out even after a filer’s income tax bill has been reduced to zero. For households that count on that money to cover rent, groceries or a car repair, a rule limiting who can collect it is worth watching closely, even though it has not been finalized and would not apply to returns already filed.
Treasury Secretary Scott Bessent and IRS Chief Executive Officer Frank Bisignano announced the proposal on August 19, 2026, describing it as enforcement of an existing 1996 welfare law rather than a new restriction on the credits themselves. Neither official set a date for when a final rule might actually take effect.
What the Proposed Rule Would Actually Limit
The proposal rests on the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, a law that generally restricts non-citizens from receiving federal public benefits. Treasury and the IRS say the refunded portion of certain tax credits — the amount that exceeds a filer’s income tax liability for the year and comes back as cash — meets the legal definition of a federal public benefit under that law. That conclusion follows an analysis from the Department of Justice’s Office of Legal Counsel, according to both the IRS announcement and a companion release from the Treasury Department.
The rule would not touch the entire credit for every filer who claims one. A taxpayer who does not meet the citizenship or immigration test could still claim the portion of an affected credit that offsets an existing income tax bill; only the amount that exceeds that liability — the piece that comes back as a refund check — would be restricted. Treasury and the IRS describe that refunded amount as the part “that exceeds the income tax liability imposed for the tax year,” a distinction that separates a credit used to reduce a tax bill from a credit that generates a payment.
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The Four Credits Named in the Proposal
The proposed regulation names four specific credits: the Adoption Tax Credit, the Child Tax Credit, the American Opportunity Tax Credit and the Earned Income Tax Credit. The Earned Income Tax Credit is aimed at low- to middle-income workers and families and is one of the credits many working households already build into their annual tax planning. The Child Tax Credit helps offset the cost of raising children, the American Opportunity Tax Credit covers a portion of undergraduate education expenses, and the Adoption Tax Credit offsets qualified adoption costs. All four currently include a refundable component, meaning a filer can receive money back even after the tax bill hits zero — and it is only that refunded slice the new rule would restrict.
Who Counts as a Citizen, National or Qualified Alien
To receive the refunded portion of an affected credit under the proposal, a filer would need to be a U.S. citizen, a U.S. national or a “qualified alien” on the date the return claiming the credit is filed. Qualified aliens, as defined under the 1996 law, include lawful permanent residents, asylees and refugees, along with several narrower categories set out in the statute. A filer who does not meet one of those categories, including someone living in the country without legal status, would not qualify for the refunded amount of the affected credits under the proposed rule, even if that person otherwise files a return and reports income.
The proposal includes one notable exception for married couples: on a joint return, only one spouse needs to be a citizen, national or qualified alien for the household to receive the refunded portion. That detail matters for mixed-status families, where one spouse holds a Social Security number and lawful status and the other does not. Under the proposed rule, such a couple would not automatically lose access to the refunded amount because of the second spouse’s status, as long as the qualifying spouse is listed on the return.
A New Perjury Declaration on Tax Returns
Beyond the citizenship test itself, the proposal would add a filing requirement. Taxpayers claiming the refunded portion of an affected credit would have to declare, under penalty of perjury, that they are eligible to receive it. That declaration would sit alongside the signature requirements already on a federal income tax return, giving the IRS a direct enforcement tool if a claim later proves false.
The Rule Is Not Final — Public Comments and a Hearing Are Still Ahead
Nothing in the proposal takes effect yet. Treasury and the IRS published it for public comment, and the Federal Register filing sets a comment deadline of October 5, 2026, with a public hearing scheduled for October 14, 2026, for anyone who requests to speak. Even after the comment period closes, the agencies still have to finalize the regulation, and the proposal itself states it would apply only to tax years ending on or after the date a final rule is published — meaning any change to refund eligibility would not reach back and affect returns already filed.
This article was produced with AI assistance and reviewed by a human editor. Figures are linked to their primary sources; where a claim could not be verified from the public record, we say so.
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