Proposed Regulations May Restrict Refundable Tax Credits for Certain Non-Citizens

The U.S. Treasury Department recently issued proposed regulations that could significantly alter eligibility for certain refundable tax credits for individuals who are not U.S. citizens or nationals, as enrolled agent Thomas A. Gorczynski wrote in Tom Talks Taxes. These changes would introduce an immigration status test, moving beyond the current criteria of tax residency and possession of a work-eligible Social Security number.

Key Changes Proposed

Under current tax law, eligibility for most refundable credits primarily depends on an individual's tax residency status, determined by factors such as the substantial presence test under Internal Revenue Code (IRC) §7701(b) ^[1], and having a valid Social Security number (SSN) authorized for employment. The proposed regulations, however, introduce a third, immigration-based requirement. If finalized, taxpayers would need to be a U.S. citizen, a U.S. national, or a "qualified alien" as defined by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) ^[2].

This proposed change could affect individuals who currently meet tax residency and SSN requirements but do not fall into the new immigration categories. For instance, a nonimmigrant worker on an H-1B visa who has lived in the U.S. for several years, files as a tax resident, and possesses a valid SSN would generally be ineligible for the refunded portion of these credits under the new rules. Similarly, Deferred Action for Childhood Arrivals (DACA) recipients with work authorization would also likely be impacted.

Effective Date

The Treasury Department plans for these final regulations to apply to tax years ending on or after their publication date. If the regulations are finalized and published by December 31, 2026, they would take effect for the 2026 tax year. The issuance of draft forms related to these changes suggests the Treasury's intent for a prompt implementation.

Refundable Credits as Federal Public Benefits

The foundation of these proposed regulations rests on the Treasury's interpretation of the refunded portion of certain tax credits as "Federal public benefits." PRWORA generally prohibits individuals who are not "qualified aliens" from receiving such benefits under 8 U.S.C. §1611(a) ^[3]. The Treasury's stance is that when a refundable credit generates a payment to a taxpayer beyond their total income tax liability, this refunded amount constitutes a payment from appropriated funds and therefore qualifies as a federal public benefit.

It is important to distinguish between the portion of a refundable credit used to offset an individual's tax liability and the portion that results in a direct refund. Any amount of a refundable credit that reduces a taxpayer's income tax liability (which includes taxes under Subtitle A of the Internal Revenue Code, such as income tax, self-employment tax, and net investment income tax ^[4]) would not be affected by these proposed regulations. Only the amount refunded to the taxpayer after their tax liability is zeroed out would be subject to the new immigration-status test.

Affected Tax Credits

The proposed regulations specifically target the refunded portions of four widely claimed tax credits:

* The Adoption Credit (IRC §23) [5]

* The Child Tax Credit, including the Additional Child Tax Credit (IRC §24) ^[6]

* The American Opportunity Tax Credit (IRC §25A) [7]

* The Earned Income Tax Credit (IRC §32) [8]

The Treasury also noted that the refunded portions of the Premium Tax Credit (IRC §36B) and the new Saver's Match (IRC §6433) are considered Federal public benefits. However, the PRWORA requirements will not apply to the Premium Tax Credit due to specific eligibility rules in the Affordable Care Act that supersede PRWORA for tax years beginning after December 31, 2026. Separate proposed regulations are expected for the Saver's Match.

Eligibility for Refunded Portions

Under the proposed rules, only U.S. citizens, U.S. nationals, and "qualified aliens" would be eligible to receive the refunded portion of these tax credits.

A U.S. national, as defined by 8 U.S.C. §1101(a)(22), is a non-citizen who owes permanent allegiance to the United States. This status typically applies to individuals born in U.S. territories like American Samoa or Swains Island.

The definition of a "qualified alien" is derived from 8 U.S.C. §1641 and includes several categories of non-citizens with specific immigration statuses, such as:

* Lawful permanent residents (green card holders)

* Individuals granted asylum (INA §208)

* Refugees admitted (INA §207)

* Certain parolees (INA §212(d)(5)) for a period of at least one year

* Aliens whose removal is being withheld (INA §243(h) or §241(b)(3))

* Conditional entrants under INA §203(a)(7) (as in effect before April 1, 1980)

* Cuban and Haitian entrants (under §501(e) of the Refugee Education Assistance Act of 1980)

* Citizens of Micronesia, the Marshall Islands, and Palau lawfully residing in the U.S. under a Compact of Free Association

* Battered spouses, children, and their parents or children with an approved or pending petition demonstrating a substantial connection between abuse and the need for the benefit

* T nonimmigrant status holders and applicants who have established a prima facie case

Ineligible Categories

Individuals who do not fit into the aforementioned categories would be ineligible for the refunded portions of these credits, regardless of their tax residency or SSN status. This includes, but is not limited to:

* Individuals without lawful immigration status, including those in removal proceedings

* Nonimmigrants on temporary visas (e.g., H-1B, L-1, F-1, J-1, O-1, TN, E-2)

* DACA recipients

* Temporary Protected Status (TPS) holders

* Parolees admitted for less than one year

* Asylum and withholding of removal applicants whose cases are pending

* U nonimmigrant status holders

* Applicants for adjustment of status who have not yet been granted permanent residence

Spousal Rule and Status Determination

For married individuals filing jointly, the proposed regulations include a provision where if one spouse is a U.S. citizen, U.S. national, or qualified alien, the other spouse is treated as a qualified alien for the purpose of claiming these refundable credits. This rule applies across all affected refundable credits.

An individual's eligibility status for these credits is determined on the date the tax return claiming the credit is filed. If a taxpayer was ineligible when they initially filed their return and claimed a credit, a subsequent change in their immigration status would not allow them to amend that specific return to recover the refunded portion. Conversely, if a taxpayer did not claim a credit on their original return but later becomes a qualified alien, they could file an amended return to claim the credit, and their eligibility would be assessed based on their status at the time of filing the amended return.

Perjury Declaration and New Schedule

Under the proposed rules, each taxpayer claiming an affected refundable credit would be required to declare their eligibility under penalty of perjury on their tax return. This declaration, along with the calculation of the refunded portion of all refundable credits, would be made on a new Schedule 3-A, titled "Federal Public Benefit." The draft forms also suggest an option for filers to forgo any refunded portions, which could simplify tax filings for certain groups, such as those with religious objections to receiving these benefits.

It is important to note that the PRWORA eligibility requirement would apply only to the taxpayer (or one spouse in a joint filing) claiming the benefit, not to any qualifying child or dependent for whom the credit is claimed.