Additional Coverage:
The Treasury Department and IRS have proposed new rules that could reduce federal tax refunds for some taxpayers legally authorized to work in the United States. The proposed changes, announced on August 19, would classify the refundable portions of four key tax credits as federal public benefits. This reclassification would make certain noncitizens ineligible to receive these refunds, potentially cutting thousands of dollars from their returns.
The four credits affected are the Child Tax Credit, Earned Income Tax Credit (EITC), American Opportunity Tax Credit, and Adoption Tax Credit. Treasury estimates that between 200,000 and 700,000 taxpayers might lose some or all of their refundable credit amounts under these new rules, which could limit the financial resources of many families facing rising living costs.
How the Proposal Works
Importantly, the proposed rule targets only the refundable portions of these credits. Refundable credits can reduce tax liability below zero and result in a refund, while nonrefundable credits only reduce taxes owed to zero. By treating refundable amounts as federal public benefits under a 1996 law, the Treasury would require recipients to meet certain immigration status criteria-namely, being a U.S. citizen, U.S. national, or “qualified alien” when filing their tax returns.
While this aims to prevent ineligible individuals from accessing federal benefits, the definition of “qualified alien” excludes some groups authorized to work legally in the U.S., such as certain Temporary Protected Status (TPS) and Deferred Action for Childhood Arrivals (DACA) recipients, asylum applicants with work permits, U and T visa holders, and some temporary visa workers. These taxpayers often have valid Social Security numbers and file federal returns but could see their refundable credits reduced or eliminated.
There is a safeguard for mixed-status couples: when filing jointly, only one spouse needs to meet the eligibility criteria for the couple to claim these refundable credits.
Potential Impact on Key Credits
The EITC could be the most significantly affected credit, as it offers substantial refunds to low- and moderate-income workers-up to $8,231 in 2026 for those with three or more qualifying children. The Child Tax Credit provides up to $2,200 per child, with a refundable portion of up to $1,700 per child in 2026. For families with multiple children, this could represent thousands of dollars at stake.
Higher education and adoption tax credits are also involved. The American Opportunity Tax Credit allows up to $2,500 per student, including $1,000 refundable, while the Adoption Tax Credit can reach up to $17,670 per child, with $5,120 refundable.
Treasury estimates the average refundable amount at risk per affected taxpayer is about $3,656, totaling between $700 million and $2.6 billion overall.
Next Steps and What Taxpayers Should Know
These proposed regulations are not yet final. Public comments are being accepted through October 5, and a hearing is scheduled for October 14. If finalized, the rules would apply to tax years ending on or after the date of publication, potentially impacting 2026 tax returns filed in 2027.
Taxpayers should not assume their refund eligibility has changed at this point but should stay informed as the rulemaking process continues.
Financial Planning Considerations
For households that rely on these refundable credits, a potential reduction in refunds could make managing expenses more challenging. It may be prudent to explore ways to strengthen financial security, such as increasing income through side jobs, growing savings with long-term investments, and maximizing available discounts on everyday expenses like auto insurance.
Though the final impact remains uncertain, staying aware and preparing for possible changes can help families navigate future financial hurdles.