Why It Matters
Treasury and the IRS have proposed a rule that would, for the first time, classify the refundable portions of four federal tax credits as federal public benefits under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), making non-qualified aliens ineligible to receive them, according to a new Congressional Research Service (CRS) report.
The IRS estimates 200,000 to 700,000 filers, or 0.8% to 2.8% of all taxpayers, would lose noncitizen tax credit eligibility for the refundable portions in 2026.
The four credits at issue are the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), the adoption tax credit and the American Opportunity Tax Credit (AOTC).
The rule would affect only the portion of each credit that exceeds a filer's income tax liability; the nonrefundable portion would be unchanged.
The Big Picture
Historically, tax credits have not been treated as federal public benefits under PRWORA, so the noncitizen restrictions in that law have not applied to them. Treasury and the Internal Revenue Service have proposed a regulation that would make that change.
The Center on Budget and Policy Priorities estimated that the CTC and EITC changes alone would affect roughly 1 million individuals, including U.S. citizen family members, a figure larger than the IRS's top estimate of 700,000 filers, because filing units contain multiple people beyond the filer.
Lower-income households and households with children would be affected more heavily, because the CTC and EITC phase in with earned income and are already unavailable to those with no earned income.
Of the 33 jurisdictions that offer state earned income credits (32 states and the District of Columbia), 30 base them on a percentage of the federal EITC, meaning the rule could reduce state credits for affected filers as well.
The CRS report also flags potential administrative and chilling effects: filers would need to affirm qualified-alien status on a new draft Schedule 3-A, and some may avoid filing out of concern that tax information could be used in immigration enforcement.
Legal challenges to an IRS arrangement to share return information with Immigration and Customs Enforcement are delaying that arrangement's implementation, though those challenges concern the sharing agreement, not the proposed tax-credit rule.
The Bottom Line
The IRS cancelled the public hearing scheduled for Oct. 14 after receiving no requests to testify. That cancellation does not finalize or withdraw the proposal. The IRS has not announced when it will issue final regulations, though the comment period on the proposed rule closed October 5.
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