Treasury and IRS Move to Limit Refundable Tax Credits to Citizens and Qualified Aliens

On August 19, the Treasury Department and the IRS announced a proposed regulation that classifies the refundable portion of four major tax credits—the earned income tax credit, child tax credit, American opportunity tax credit, and adoption credit—as a federal public benefit. Under the 1996 Personal Responsibility and Work Opportunity Reconciliation Act, only citizens, nationals and a defined list of qualified aliens may receive such benefits, a restriction the agencies are now enforcing after 30 years of inactivity.

The regulation would obligate taxpayers claiming refunds that exceed their tax liability to attest to their eligibility under penalty of perjury, though a single qualifying spouse suffices for joint returns. Treasury projects that between 200,000 and 700,000 filers could be barred from refunds, potentially saving as much as $2.6 billion in the 2026 tax year. Critics note that many DACA recipients, TPS holders and H-1B visa holders would be excluded, raising fairness concerns, but the agencies stress the rule follows existing statutory language. A 45-day comment period and an October 14 hearing are scheduled, with the rule not expected to take effect before the 2026 returns filed in 2027.