The IRS Wants to Block Some Taxpayers From Claiming 4 Refundable Tax Credits

Some taxpayers who are legally authorized to work in the U.S. could lose thousands of dollars from their federal tax refunds under new rules proposed by the Treasury Department and IRS.

Under the August 19 proposal, the refundable portions of four tax credits would be classified as federal public benefits, making certain noncitizens ineligible to receive that money. As a result, affected households could have less money available to cope with increasing bills.

The change would apply to the Child Tax Credit, Earned Income Tax Credit, American Opportunity Tax Credit, and Adoption Tax Credit, with the Treasury estimating that 200,000 to 700,000 taxpayers could lose refundable credits under the proposal.

The IRS proposal targets the refundable part of 4 credits

The Treasury and IRS proposal wouldn't necessarily prevent affected taxpayers from claiming the four credits altogether, with the restriction applying specifically to the refundable portion.

Refundable tax credits are valuable because they could reduce your federal income tax liability below zero, potentially putting additional money into your refund. A nonrefundable credit generally stops providing a benefit once your income tax liability reaches zero.

Under the proposal, the refundable portions of all four credits would be treated as federal public benefits under a 1996 law, adding a separate immigration-status test to who can receive that money. To receive them, a taxpayer would need to be a U.S. citizen, U.S. national, or "qualified alien" when filing the return.

Some legally authorized workers could lose refunds

The Treasury says the change is intended to stop people who are not eligible for federal public benefits from receiving them through the tax system. However, the proposal could reach beyond undocumented immigrants.

The "qualified alien" category includes lawful permanent residents, refugees, people granted asylum, and certain other groups, but some people who are legally present and authorized to work fall outside it.

The Tax Policy Center says that could include some TPS and DACA recipients, asylum applicants with work authorization, U and T visa holders, and certain workers on temporary visas. Many of these taxpayers can have valid Social Security numbers, work legally, and file federal income tax returns.

There is an important protection for some mixed-status marriages. On a joint return, only one spouse would need to be a U.S. citizen, U.S. national, or qualified alien for the couple to meet the proposed requirement.

The Earned Income Tax Credit could put thousands at stake

The Earned Income Tax Credit (EITC) could create some of the biggest potential losses because it can be worth thousands of dollars for low- and moderate-income workers.

The maximum EITC for the 2026 tax year is $8,231 for an eligible taxpayer with three or more qualifying children, according to the IRS's 2026 inflation adjustments, although the actual amount depends on income, filing status, and number of qualifying children.

The Treasury estimates that 49 million tax returns will claim at least one of the four affected credits for 2026, with about 24 million receiving a refundable amount covered by the proposed rule.

Families could lose refundable Child Tax Credit money

The Child Tax Credit is worth up to $2,200 per qualifying child, but only part of that amount is refundable. In 2026, the Additional Child Tax Credit can provide up to $1,700 per qualifying child as a refund. That means a household with two qualifying children could have as much as $3,400 of refundable credit at stake.

Families already have to meet Social Security number requirements to claim the Child Tax Credit. The proposed rules would add a separate immigration-status test for the refundable portion.

A family could therefore meet the tax code's existing requirements yet lose some or all of the amount that would otherwise arrive as a refund if the taxpayer doesn't meet the proposed federal-benefit eligibility standard.

Education and adoption credits are also affected

The American Opportunity Tax Credit can provide up to $2,500 per eligible student for qualified higher-education expenses, with up to $1,000 refundable.

The Adoption Tax Credit carries an even larger refundable amount. In 2026, the overall credit can reach $17,670 per qualifying child, including up to $5,120 that is refundable.

Treasury estimates up to 700,000 taxpayers could be affected

Treasury and the IRS estimate that between 200,000 and 700,000 taxpayers could lose refundable amounts under the proposal for tax year 2026.

According to the agencies, affected taxpayers receive an average of $3,656 through the refundable portions of these credits, putting the total amount potentially at stake at roughly $700 million to $2.6 billion.

That doesn't mean every affected taxpayer would lose $3,656. Some could lose considerably less, while households qualifying for multiple credits could potentially have much more at stake.

The rules haven't taken effect yet

Taxpayers shouldn't assume their refund eligibility has already changed. These are proposed regulations, not final rules. Written comments are due by October 5, and the Treasury has scheduled a public hearing for October 14.

If finalized, the regulations would apply to tax years ending on or after the date the final regulations are published. As a result, they could potentially affect 2026 returns filed in 2027 if the rules become final before the end of this year.

Bottom line

The Treasury and IRS proposal could shrink refunds for certain noncitizens by restricting the refundable portions of four major tax credits. If finalized, the change could affect 200,000 to 700,000, according to Treasury estimates.

Nothing has changed yet, however. The proposal still has to go through the rulemaking process, and its final wording and effective date will determine who actually loses access to refundable credits. Still, households that rely on refundable credits may want to prepare for the possibility that a smaller refund could make it harder to get ahead financially.

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