US proposes new tax credit rules restricting refunds for some non-citizens

The US Treasury Department and Internal Revenue Service have proposed new rules that would restrict the refundable portion of four federal tax credits to US citizens, US nationals and certain qualified non-citizens, including green card holders, refugees and asylees.

Announced on August 19, the proposed regulations cover the child tax credit, earned income tax credit, American opportunity tax credit and adoption tax credit. The rules are not yet final and would apply to tax years ending on or after the date the final regulations are published.

What would change

The proposal seeks to clarify how the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, or PRWORA, applies to refundable tax credits.


Under PRWORA, US citizens, US nationals and "qualified aliens" can receive federal public benefits. The Treasury said the proposal follows a legal analysis by the Department of Justice's Office of Legal Counsel that concluded that the refunded portions of the affected tax credits qualify as federal public benefits.

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As a result, people who do not fall into one of the eligible categories would not be allowed to receive the refundable portion of these credits.

Qualified non-citizens under the proposal include lawful permanent residents, commonly known as green card holders, asylees, refugees and certain other groups covered under PRWORA.

What does 'refundable' mean?

The restriction applies only to the part of a tax credit that results in money being paid to a taxpayer after their income tax liability has been covered.

For example, if an eligible tax credit is larger than a person's income tax liability, some or all of the remaining amount may be paid as a refund. It is this refunded amount that the proposed regulations would treat as a federal public benefit.

A taxpayer who is not eligible for the refunded portion could still use an affected credit to reduce their income tax liability if they otherwise qualify for that credit.

What taxpayers would have to do

To receive the refundable portion, a taxpayer would have to be a US citizen, US national or qualified non-citizen on the date they file the federal income tax return that first claims the credit.

They would also have to declare on their tax return, under penalty of perjury, that they are eligible for the refundable amount.

For married couples filing a joint tax return, only one spouse would need to be a US citizen, US national or qualified non-citizen.

Which tax credits are covered?

The proposal covers four credits: the adoption tax credit, child tax credit, American opportunity tax credit and earned income tax credit.

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

Treasury Secretary Scott Bessent said, “Under President Trump, the days of illegal aliens collecting taxpayer-funded benefits are over. The federal law is clear, and Treasury is enforcing it.”

Rules are not final yet

The regulations are currently only a proposal. The Treasury and IRS will accept public comments and requests for a public hearing before the regulations are finalised.

If adopted, the regulations would apply to tax years ending on or after the date the final rules are published.