Trump Says a New Tax Rule Could Save $3 Billion - Here's What It Actually Changes

President Donald Trump is drawing attention to a proposed tax rule that his administration says could prevent billions of dollars in refundable tax credits from going to people who don't meet federal immigration-status requirements.

The Treasury Department and IRS proposal would apply new eligibility rules to the refundable portions of four credits, including the Child Tax Credit and Earned Income Tax Credit, potentially putting thousands of dollars at stake for some households struggling to cope with increasing bills.

Treasury wants to restrict the refundable portion of 4 tax credits

The Treasury Department and IRS announced the proposed regulations on August 19, saying the refundable portions of the four affected credits would be treated as federal public benefits under a 1996 law.

"Under President Trump, the days of illegal aliens collecting taxpayer-funded benefits are over. The federal law is clear, and Treasury is enforcing it," Treasury Secretary Scott Bessent said.

Bessent added that taxpayers shouldn't have to fund benefits for people barred by law from receiving them, framing the proposal as a way to protect the tax system from improper payments.

Trump highlighted claims of $3 billion in savings

Treasury and the IRS estimate that about 49 million returns will claim at least one of the four affected credits for tax year 2026, with around 24 million receiving a refundable amount covered by the proposal.

Of those, roughly 200,000 to 700,000 taxpayers could fail the new immigration-status test. With an average refundable benefit of about $3,656, Treasury puts the total amount potentially disallowed at roughly $700 million to $2.6 billion.

Trump amplified the issue on August 21 by sharing an article on Truth Social that framed the proposal as ending tax breaks for undocumented immigrants, putting the administration's estimate close to the roughly $3 billion figure promoted by supporters.

Most taxpayers claiming these credits would not be affected

Most people claiming these credits wouldn't lose their refunds because of the proposed immigration-status test. U.S. citizens, U.S. nationals, and qualified immigrants, including lawful permanent residents, refugees, and asylees, could still receive refundable amounts if they otherwise qualify.

Joint filers also get some protection. According to the Treasury, only one spouse would need to be a U.S. citizen, U.S. national, or qualified alien for the return to meet the proposed requirement.

Some legally present immigrants could still lose refunds

The Treasury has promoted the proposal largely as a crackdown on benefits going to people who aren't legally eligible for federal public benefits. However, the term "non-qualified alien" is broader than "undocumented immigrant."

Some people who are legally present or authorized to work can still fall outside the federal definition of a qualified alien. As a result, they could potentially lose access to refundable amounts even if they otherwise meet the tax rules for the credit.

Existing tax rules also impose separate eligibility requirements on these credits. The proposal wouldn't replace those rules. It would add another test that determines whether someone who otherwise qualifies for a credit can receive the portion exceeding their federal income tax liability.

Refundable credits can put money back in your pocket

Refundable credits matter because they can still produce a payment after someone's federal income tax liability falls to zero.

"Refundable tax credits, like the Earned Income Tax Credit (EITC), were enacted to help low-to-middle income American families and workers receive critical financial support," IRS Chief Executive Officer Frank J. Bisignano said.

Under the proposal, someone who fails the new immigration-status test could still use an affected credit to reduce tax they owe if they otherwise qualify. What they could lose is the refundable amount above that liability.

Thousands of dollars could be at stake

The amount an affected household could lose would depend on which credits it qualifies for, its tax liability, and how much would otherwise be refundable.

The maximum Earned Income Tax Credit reaches $8,231 in 2026 for an eligible taxpayer with three or more qualifying children, while the Child Tax Credit can provide up to $1,700 per child through its refundable portion.

The American Opportunity Tax Credit can provide up to $1,000 in refundable money per eligible student, while the 2026 Adoption Tax Credit can provide up to $5,120 refundable per eligible child. Depending on the household, losing access to one or more of those amounts could shrink a refund by thousands of dollars.

The tax change is not in effect yet

Despite some of the language used in coverage shared by Trump, Treasury and the IRS haven't already ended these refundable credits for affected taxpayers. The Federal Register notice makes clear that these are proposed regulations.

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

Bisignano said the administration believes the change would ensure federally funded benefits are "reserved for eligible taxpayers" while protecting taxpayer dollars. The final rules could still change during the regulatory process.

Bottom line

Trump has highlighted claims that the proposal could save taxpayers around $3 billion, while Treasury estimates that 200,000 to 700,000 taxpayers could lose between $700 million and $2.6 billion in refundable credits.

The rules are not in effect yet, however. U.S. citizens, U.S. nationals, and qualified immigrants would not lose refunds because of the new immigration-status test, and the final wording and effective date will determine who is actually affected. Still, you may want to check up on your financial health before assuming their 2026 refund could look the same.

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