Treasury and the IRS have proposed a new rule that would change who can collect the extra, refunded portion of four popular tax credits. The proposal targets people living in the country illegally, but the mechanics of how it would work, and what it would leave untouched, matter for millions of mixed-status and immigrant households filing returns in the years ahead. Nothing in the proposal has taken effect. It is a draft regulation open for public comment, not a change to this year’s tax forms.
What the Proposed Rule Would Actually Change
On Aug. 19, 2026, the Treasury Department and the IRS issued proposed regulations that would apply a 1996 welfare law, the Personal Responsibility and Work Opportunity Reconciliation Act, to the refunded portion of four tax credits: the Child Tax Credit and its Additional Child Tax Credit component, the Earned Income Tax Credit, the American Opportunity Tax Credit, and the adoption credit. The proposal would classify that refunded portion as a federal public benefit, which under the 1996 law can only go to U.S. citizens, U.S. nationals, and people the law defines as “qualified aliens,” a category that includes lawful permanent residents, asylees, and refugees but not people living in the country without legal status.
Treasury Secretary Scott Bessent framed the move as an enforcement measure, saying the department is applying federal law he described as already clear on who can receive taxpayer-funded benefits. IRS Chief Executive Officer Frank Bisignano said the credits, especially the Earned Income Tax Credit, were built to support low- and middle-income working families, and that the proposed rule is meant to keep that support flowing only to filers eligible to receive it.
The proposal follows a legal analysis from the Department of Justice’s Office of Legal Counsel, which concluded that the refunded portions of these four credits meet the legal definition of a federal public benefit. That analysis is the legal foundation the agencies cite for extending the 1996 law’s citizenship-and-status test to credits that, until now, had not been treated that way in IRS regulations.
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The Difference Between “Refunded” and “Nonrefundable” Matters Here
The proposal draws a sharp line between the part of these credits that offsets a filer’s tax bill and the part that comes back as cash after that bill hits zero. Under the draft rule, only the second piece, the amount that exceeds a household’s income tax liability for the year, would count as a federal public benefit subject to the citizenship-and-status test. A person who doesn’t qualify for the refunded portion under the proposal could still claim whatever part of an affected credit offsets their own tax liability; the proposal does not touch that piece at all.
That distinction is why the IRS’s own description of the proposal stresses that it is narrower than a blanket ban on any of the four credits. A qualifying child, the underlying expense, or the education costs behind these credits would still generate a tax benefit for an otherwise-eligible filer; what changes is whether the government would send a refund check once the tax bill is already at zero.
The Four Credits the Proposal Would Cover
The text of the proposed regulation names the Child Tax Credit, the American Opportunity Tax Credit, the adoption credit, and the Earned Income Tax Credit as the four credits whose refunded portions would be reclassified. Each of these already carries its own eligibility rules tied to income, qualifying children or dependents, education expenses, or adoption costs; the proposal layers a citizenship-and-status test on top of those existing rules, applied specifically to the refunded slice of the benefit. The Child Tax Credit and the Earned Income Tax Credit are claimed by the largest number of households of the four, which is why any change to their refundable structure draws attention well beyond immigration policy circles.
How a Joint Return Would Be Treated
For married couples filing jointly, the proposal sets a lower bar than a household might expect: only one spouse needs to be a U.S. citizen, U.S. national, or qualified alien on the date the couple files the return claiming the credit. The other spouse’s status would not, by itself, disqualify the household from the refunded portion. The taxpayer would also have to declare, under penalty of perjury, that the household is eligible to receive that refunded amount, adding a certification step to returns that claim these credits if the rule is finalized as written.
What Happens Next: Comment Period and Effective Date
Because this is a proposed regulation, not a final one, it carries no legal weight yet. Treasury and the IRS are accepting public comments and requests for a hearing, with instructions for submitting them included in the proposed text itself. The agencies have not announced a target date for finalizing the rule. As written, the proposed regulations would apply to tax years ending on or after the date a final rule is published, meaning even a quick comment process would leave the current tax year’s filings under the existing rules.
Until a final rule appears in the Federal Register, the eligibility rules for the Child Tax Credit, the Earned Income Tax Credit, the American Opportunity Tax Credit, and the adoption credit remain exactly as they are today, and filers claiming any of the four credits this season should not expect the proposed citizenship-and-status test to apply to their current return.
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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