US Treasury and IRS Propose Restrictions on Refundable Tax Credits for Certain Immigrants

The Treasury Department and the Internal Revenue Service (IRS) have put forth proposed regulations that would restrict certain immigrants' access to refundable tax credits. These credits, which can be received as a cash refund if they exceed a taxpayer's liability, are a significant financial benefit for many households, particularly those with lower incomes.

Experts anticipate that these proposed rules could disqualify hundreds of thousands, and possibly millions, of individuals from claiming these crucial tax benefits. This action is seen as an extension of the previous administration's approach to leverage financial policies to enforce stricter immigration measures.

The proposed rules specifically target four key tax credits: the adoption tax credit, the child tax credit, the American Opportunity tax credit, and the earned income tax credit. The refundable portions of these credits would now be classified as 'federal public benefits.' This classification would prevent many noncitizens, even those with work authorization and Social Security numbers, from receiving these benefits as refunds.

According to Margot Crandall-Hollick, a principal research associate at the Urban-Brookings Tax Policy Center, this change would affect immigrants with pending asylum applications, those holding Temporary Protected Status (TPS), and recipients of Deferred Action for Childhood Arrivals (DACA), among others.

Treasury Secretary Scott Bessent stated that the proposed rules are intended to "protect the integrity of the tax system, and put Americans first."

Estimates suggest that the impact could be substantial, potentially affecting "several million people." For context, the Pew Research Center reported approximately 2.6 million asylum applicants in 2023. Additionally, around 650,000 individuals had TPS, and 600,000 were enrolled in DACA during the same year.

These numbers may have seen shifts due to recent immigration enforcement actions. For instance, a Supreme Court decision allowed the administration to revoke TPS protections for a significant number of Haitian and Syrian immigrants.

The current tax proposal is part of a broader trend to limit immigrants' access to public benefits, as noted by immigration expert Mark Greenberg of the Brookings Institution. Previous legislation signed into law also narrowed eligibility for programs like Medicaid, Medicare, Affordable Care Act premium tax credits, the child tax credit, and the Supplemental Nutrition Assistance Program.

Under the proposed rules, immigrants in question would still be able to claim the nonrefundable portion of the affected tax credits. This means the credits could reduce their tax liability down to zero, but they would no longer be able to receive any excess amount as a refund.

The policy is expected to disproportionately affect lower-income households, as they often rely on the refund component of these credits due to their limited tax liability. For married couples filing jointly, if one spouse is a U.S. citizen, national, or a 'qualified alien,' they may still be eligible for the refundable portion of these tax breaks.

The proposal is open for a 45-day public comment period, with a public hearing scheduled for October 14. The Treasury and IRS will review these comments before issuing a final rule. If finalized this year, the regulations would take effect for tax years ending on or after the finalization date, impacting tax returns filed for the 2026 tax year.