The Trump administration is proposing new restrictions that could prevent hundreds of thousands of noncitizens from receiving the refundable portion of four major federal tax credits.
The Treasury Department and IRS released the proposed regulations on August 19, 2026. They would apply immigration eligibility requirements from a 1996 welfare law to the adoption tax credit, the Child Tax Credit, the American Opportunity Tax Credit, and the Earned Income Tax Credit.
The change would not eliminate every tax benefit available to an affected taxpayer. Instead, it would target the portion of those credits that exceeds federal income tax liability and can normally be refunded or used as an offset. The proposal must still go through the federal rulemaking process before becoming final.
Four tax credits would be affected
The proposal covers four individual income tax credits with refundable components.
They are the Earned Income Tax Credit, Child Tax Credit, American Opportunity Tax Credit, and Adoption Tax Credit. Treasury wants to classify their refunded portions as “federal public benefits” under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, commonly called PRWORA.
Under that interpretation, taxpayers receiving those refunded amounts would generally need to be U.S. citizens, U.S. nationals, or “qualified aliens” as defined by federal law.
The qualified-alien category includes several groups of lawfully present immigrants, such as lawful permanent residents, refugees, people granted asylum, and other protected categories.
The proposal reaches beyond undocumented immigrants
Administration statements have framed the rule primarily as preventing undocumented immigrants from receiving taxpayer-funded benefits.
However, the actual proposal is broader. It would apply to any noncitizen who does not meet PRWORA’s definition of a qualified alien, meaning some people legally present in the United States could also be affected.
Treasury says taxpayers would generally have to be U.S. citizens, U.S. nationals, or qualified aliens when they first file a return claiming the affected credit for that tax year.
For married couples filing jointly, the proposed rules state that one spouse meeting the required status would suffice to satisfy this particular eligibility test for the refunded portion.
Only the refunded portion is targeted
A refundable tax credit can do more than reduce a person’s federal income tax bill.
If qualifying refundable credits exceed the taxpayer’s applicable income tax liability, some or all of that excess can result in money being refunded, credited against certain debts, or otherwise treated as an overpayment.
The proposed regulations would classify that excess portion as the federal public benefit subject to PRWORA’s immigration restrictions.
Treasury specifically says affected taxpayers could still receive the non-refunded portion of a credit when they otherwise satisfy the tax code’s requirements. That makes the proposal narrower than eliminating the four credits for every affected noncitizen.
The savings estimate is below $3 billion
Treasury and the IRS estimate that about 49 million tax returns will claim at least one of the four affected credits for tax year 2026.
Approximately 24 million are expected to receive a refund that the Treasury would classify as a federal public benefit. But the agencies acknowledge they lack direct data on exactly how many of those taxpayers fail PRWORA’s immigration-status test.
Using Social Security Administration, immigration, and historical Homeland Security information, the Treasury produced a rough estimate of 200,000 to 700,000 affected taxpayers.
Applying an estimated average refundable benefit of $3,656 produces between $0.7 billion and $2.6 billion in disallowed credits for 2026. The upper estimate can reasonably be described as approaching $3 billion, but $3 billion is not Treasury’s official estimate.
Popular credits work in different ways
The four credits do not all follow the same rules.
For 2025, the Child Tax Credit was worth up to $2,200 per qualifying child, with up to $1,700 potentially available through its refundable component, known as the Additional Child Tax Credit. Those figures are adjusted for inflation in later years.
The American Opportunity Tax Credit can reach $2,500 for qualifying higher-education expenses, with 40% potentially refundable. The Earned Income Tax Credit is refundable and varies based on factors such as earnings, filing status, and qualifying children.
The adoption credit became partly refundable beginning with tax year 2025. For 2026, the maximum overall adoption credit is $17,670, with up to $5,120 refundable.
Taxpayers would certify their status
The proposal would add an immigration-status certification process for taxpayers seeking refundable amounts covered by the new interpretation.
Taxpayers would provide a declaration or attestation under penalty of perjury stating whether they are U.S. citizens, U.S. nationals, or qualified aliens when a claim includes an affected refundable benefit. Treasury expects tax preparation software to help calculate which portion of a credit is subject to the rule.
The agencies estimate that more than 96% of individual federal tax returns are prepared using consumer or professional tax software.
Treasury argues this approach should keep the additional paperwork relatively limited while giving the IRS a mechanism to enforce the new eligibility standard.
The restrictions are not final yet
The August 19 announcement is a notice of proposed rulemaking rather than a completed change to tax law.
The proposal is scheduled for Federal Register publication on August 20. Treasury and the IRS will accept public comments, and a public hearing is scheduled for October 14, 2026.
The draft regulations say the changes would apply to tax years ending on or after the date final regulations are eventually published.
That means taxpayers should not treat the August announcement as an immediate cancellation of refunds. The final rules could also change after public comments and agency review.
TL;DR
- Treasury and the IRS proposed new tax credit regulations on August 19, 2026.
- The rules are not yet final.
- They cover the refundable portions of 4 federal tax credits.
- Eligibility would generally be limited to U.S. citizens, U.S. nationals, and qualified aliens under PRWORA.
- The proposal can affect some legally present noncitizens, not only undocumented immigrants.
- Treasury estimates 200,000 to 700,000 taxpayers could be affected in 2026.
- The government estimates $0.7 billion to $2.6 billion in refundable credits could be disallowed, not the confirmed $3 billion.
