The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have proposed new rules that would restrict access to the refundable portion of certain federal tax credits for immigrants who don't meet federal eligibility requirements. The proposal, announced Wednesday, aims to clarify that these refunds are considered a federal public benefit under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA).

Treasury Secretary Scott Bessent didn't mince words in the announcement: "Under President Trump, the days of illegal aliens collecting taxpayer-funded benefits are over. The federal law is clear, and Treasury is enforcing it." He added that the proposed regulations would protect the integrity of the tax system and ensure that taxpayer-funded benefits don't go to people barred from receiving them.

IRS Chief Executive Officer Frank J. Bisignano also weighed in, noting that "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." He emphasized that the proposed regulations would ensure federally funded benefits are reserved for eligible taxpayers.

Which tax credits are affected?

The proposal targets four refundable tax credits: the adoption tax credit, the child tax credit, the American opportunity tax credit, and the earned income tax credit (EITC).

Under PRWORA, U.S. citizens, U.S. nationals, and qualified aliens are eligible for federal public benefits. The Treasury and IRS said the proposal follows legal analysis from the Department of Justice's Office of Legal Counsel, which concluded that the refunded portions of these credits are indeed federal public benefits.

Qualified aliens include lawful permanent residents, asylees, refugees, and certain other groups defined under PRWORA. The proposal is intended to strengthen enforcement of PRWORA and clarify who is legally eligible to receive these benefits.

To receive the refunded portion, a taxpayer would need to be a U.S. citizen, U.S. national, or qualified alien when filing the federal income tax return that first claims the credit. They would also have to declare eligibility under penalty of perjury. For joint tax returns, only one spouse would need to meet the citizenship, nationality, or qualified-alien requirement.

What the proposal means

It's important to note that the proposal applies only to the refunded portion of these credits—that is, the amount that exceeds a taxpayer's federal income tax liability. If a taxpayer doesn't qualify for the refunded portion, they could still claim any part of an affected credit they otherwise qualify for to reduce their tax liability.

Tax expert Margot Crandall-Hollick, a principal research associate at the Urban-Brookings Tax Policy Center, told CNBC that the proposal could affect many noncitizens who have Social Security numbers and work authorization. She noted that the policy could have the greatest impact on lower-income households because they generally have smaller tax liabilities and therefore receive more of the tax break as a refund.

A broader push on federal benefits

This proposal is part of a larger effort by the Trump administration to restrict access to federal benefits for people who don't meet certain immigration requirements. Treasury Secretary Bessent said in December that Treasury was working on regulations to restrict certain tax credits and other federal benefits for illegal and other non-qualified aliens.

The administration has also taken steps involving access to the U.S. financial system for noncitizens, while broader immigration proposals have focused on financial self-sufficiency and limiting the costs associated with immigrants receiving public benefits.

The Treasury and IRS said the proposed regulations would apply to tax years ending on or after the date the regulations are published as final regulations. The agencies will seek public comments and requests for a public hearing on the proposal.

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