The US Treasury Department and Internal Revenue Service (IRS) have proposed new rules that would restrict access to the refunded portion of four federal refundable tax credits for people who do not meet certain immigration-status requirements.
The proposed regulations seek to apply and clarify the federal law governing eligibility for taxpayer-funded refundable tax credits. The Treasury said the move is aimed at ensuring that tax benefits go only to people legally eligible to receive them.
The four tax credits covered by the proposal are the Earned Income Tax Credit (EITC), Child Tax Credit, American Opportunity Tax Credit and Adoption Tax Credit.
What are the new US tax rules?
Under the proposed regulations, a taxpayer would have to be a US citizen, US national or qualified alien on the date they file the federal income tax return that first claims the affected credit to receive its refunded portion.
The taxpayer would also have to declare on the tax return, under penalty of perjury, that they are eligible to receive the refunded portion of the credit.
Treasury said qualified aliens include lawful permanent residents, asylees, refugees and certain other groups defined or specified under the federal law.
The proposal is based on the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). The Treasury and the IRS said the regulations would strengthen enforcement of the law by clarifying that the refunded portion of the affected tax credits is a federal public benefit.
Which four tax credits are affected?
The proposed regulations cover four individual income tax credits. They include the Earned Income Tax Credit, which provides financial support to eligible low- and middle-income workers and families.
The proposal also covers the Child Tax Credit, the American Opportunity Tax Credit and the Adoption Tax Credit. Treasury said the new eligibility rules would apply specifically to the refunded portion of these credits.
What does ‘refunded portion’ mean?
The proposal makes an important distinction between the tax credit itself and the amount that is refunded to a taxpayer.
The refunded portion is the aggregate amount of the affected refundable credits that exceeds the income tax liability imposed for that tax year.
Treasury said a taxpayer who does not qualify to receive that refunded portion could still claim any part of an affected credit for which they otherwise qualify and that generally offsets their income tax liability.
The proposal specifically addresses the portion of these credits that goes beyond the taxpayer’s tax liability and is refunded.
Who would qualify under the proposal?
To receive the refunded portion, the taxpayer would have to fall into one of three broad categories: US citizen, US national or qualified alien.
Treasury said qualified aliens include lawful permanent residents, asylees, refugees and certain other groups covered by PRWORA.
For people filing a joint tax return, the proposed rules would require only one spouse to be a US citizen, US national or qualified alien.
What would taxpayers have to declare?
The proposal would require taxpayers to affirm their eligibility when filing their federal income tax return.
The declaration would be made under penalty of perjury. This means the proposed system would place an explicit responsibility on taxpayers to confirm that they meet the eligibility requirements for the refunded portion of the affected credits.
When would the new rules take effect?
The rules are not final yet. Treasury and the IRS have issued them as proposed regulations and will seek public comments and requests for a public hearing.
The proposed regulations would apply to tax years ending on or after the date the regulations are published as final regulations.
This means the proposal does not itself establish an immediate change to taxpayers’ eligibility. The final regulations and their publication date will determine when the rules apply.
Why has US government proposed the change?
Treasury said the proposal follows legal analysis by the Department of Justice’s Office of Legal Counsel, which concluded that the refunded portions of the affected credits are federal public benefits.
Under PRWORA, the Treasury said only US citizens, US nationals and qualified aliens are eligible to receive federal public benefits.
Treasury secretary Scott Bessent said the administration wants to ensure that taxpayer-funded benefits go to people who are legally eligible to receive them.
IRS chief executive officer Frank J Bisignano said refundable credits such as the EITC were created to provide financial support to eligible low- and middle-income families and workers.
Disclaimer: This article is for general informational purposes only and does not constitute legal, immigration, or tax advice. Immigration laws and government policies are subject to frequent change without notice. While we strive to provide accurate updates, readers are strongly advised to verify the latest requirements with the official embassy, consulate, or government portal of the respective country. Financial Express is not responsible for any decisions made based on this information. For personalized guidance, please consult a qualified immigration attorney or a certified professional advisor.