Treasury and the IRS proposed a new rule on August 19 that would bar most illegal immigrants and other non-qualified aliens from receiving the refunded portion of four tax credits: the child tax credit, the earned income tax credit, the American opportunity tax credit, and the adoption credit. The rule has not been finalized, and nothing changes on anyone’s current tax return while it works through the public comment process the agencies are required to run first. Treasury Secretary Scott Bessent framed the move as closing what he called abuse of taxpayer-funded benefits by people barred by law from receiving them.
What the Proposed Rule Would Require
Under the proposal, a taxpayer would need to be a U.S. citizen, a U.S. national, or a “qualified alien” — lawful permanent residents, asylees, refugees, and other categories defined under a 1996 welfare-reform law — on the date the return claiming the credit is filed, in order to receive the refunded portion of an affected credit. For a married couple filing jointly, only one spouse would need to meet that status. The proposed regulations apply specifically to the portion of a credit that exceeds what a household actually owes in income tax — the part that comes back as a refund rather than simply erasing a tax bill.
The proposal would also require a taxpayer to declare, under penalty of perjury, that they are eligible to receive the refunded portion of the credit being claimed — an attestation layered on top of the existing tax-return signature requirement, giving the IRS a specific perjury basis to pursue a return it later determines was filed by someone who did not qualify.
The legal theory behind the proposal rests on a 1996 statute, the Personal Responsibility and Work Opportunity Reconciliation Act, which restricts federal public benefits to citizens, nationals, and qualified aliens. Treasury and the IRS say the refunded share of these four credits meets that law’s definition of a federal public benefit, a conclusion the agencies attribute to legal analysis from the Department of Justice’s Office of Legal Counsel. A taxpayer who does not qualify for the refunded portion could still claim whatever share of an affected credit offsets an actual tax bill — the proposal targets only the money that would otherwise be paid out as a refund.
Free retirement updates: Want plain-English help keeping more of your money in retirement? The free Retirement Shield newsletter covers the benefits, deadlines, and money mistakes that cost retirees, a couple times a week. Subscribe free.
The Rule Is Not in Effect Yet
Nothing in the proposal is binding today. Treasury and the IRS describe the August 19 filing as proposed regulations, and the agencies say they will accept public comments and requests for a hearing before deciding whether, and in what final form, the rule takes effect. The announcement gave no fixed date by which a return would need to be filed under the new standard, stating only that the requirements would apply to tax years ending on or after the date the regulations are published as final regulations — a date that has not arrived.
The public comment period gives outside groups formal standing to argue that the rule is too broad, too narrow, or inconsistent with how the four credits have operated for decades. Treasury has not set a specific deadline for comments or hearing requests on this particular rulemaking, unlike a companion Trump Account proposal issued the same month that carries fixed dates.
That timing matters because a proposed rule can be narrowed, delayed, or withdrawn entirely during a comment period, something that has happened to other Treasury proposals in recent years. Anyone filing a return today under the existing eligibility rules for the child tax credit, the earned income tax credit, the American opportunity credit, or the adoption credit is not affected by a regulation that exists, for now, only in proposed form.
The Credits at Stake and Who Is Exempted
The four credits named in the proposal serve different populations: the earned income tax credit and the child tax credit both target lower- and middle-income working households, the American opportunity tax credit offsets college costs, and the adoption credit helps cover the expense of adopting a child. Each keeps its own income limits and eligibility tests, untouched by this proposal — the only change under discussion is a citizenship-and-status requirement layered on top of whichever credit a household already qualifies for. The Aug. 19 proposal is one of many pieces of guidance Treasury and the IRS have issued this year to implement the Working Families Tax Cuts, the 2025 law that also created new breaks for tips, overtime pay, and the Trump Account program for children — provisions separate from, and unaffected by, this specific citizenship-and-status proposal.
A taxpayer’s exposure under the proposed rule would also depend on who signs the return. Because only one spouse on a joint return would need to be a citizen, national, or qualified alien, a mixed-status household filing jointly could still receive the refunded portion of an affected credit, so long as one spouse met the standard — a distinction that separates this proposal from a household-wide bar.
The agencies have not said when a final rule might be published or whether the requirements will look the same as the August 19 draft once public comments and a possible hearing are finished. Until Treasury and the IRS take that next step, the proposal remains exactly what its own announcement calls it — a proposed regulation, not a governing one — and the citizenship-and-status rules already built into current law continue to apply to anyone filing a return this year.
This article was drafted with AI assistance and edited for accuracy.
More Financial Reading
