Millions of people in the United States are legally authorized to work and pay taxes. Some of them may be about to lose access to federal tax refunds they have been receiving for years.
The Treasury Department and the IRS on Aug. 19 proposed new rules that would restrict the refundable portion of four major federal tax credits for certain immigrants who hold legal work authorization but do not meet a specific immigration-status threshold, according to CNBC.
The rules are proposed, not final. A public comment period runs until Oct. 5, and a public hearing is scheduled for Oct. 14 before the agencies issue any final regulation.
What the Treasury and IRS proposal would do to 4 tax credits
The proposed rules would classify the refundable portion of four credits as federal public benefits under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, a law that limits certain immigrants’ access to government programs.
The four affected credits are the earned income tax credit, the child tax credit, the adoption tax credit, and the American Opportunity Tax Credit for higher education, the Treasury Department confirmed.
More Personal Finance:
- Fidelity highlights tax-free way to fund long-term care
- Codie Sanchez names the fastest wealth builder for 2026
- Billionaire Ray Dalio sees dangerous risk inside US wealth tax
A refundable credit can reduce a taxpayer’s federal income-tax bill to zero and pay out the remainder as a cash refund. The proposed rules would eliminate that refund for people who are not U.S. citizens, U.S. nationals, or “qualified aliens” under the 1996 law, even if they have a Social Security number and federal authorization to work.
People in the affected categories could still claim the nonrefundable portion of a credit. That would let them reduce their tax liability, but not receive cash above the amount they owe.
For lower-income households whose tax liability is already close to zero, the difference can be substantial. The earned income tax credit alone can be worth thousands of dollars annually to eligible working families, with most of it paid as a refund.
Which immigrants will be affected by the proposed Treasury and IRS rule?
The Treasury and IRS are targeting immigrants who can legally work in the United States but do not meet the 1996 law’s definition of a qualified alien. That definition is narrow. It covers lawful permanent residents, granted asylees, refugees, parolees admitted for at least one year and certain battered noncitizens.
It excludes people with pending asylum applications, Temporary Protected Status holders, DACA recipients, and many visa holders.
Tax experts who spoke with CNBC said the potentially affected groups include people with pending asylum applications, Temporary Protected Status holders, and DACA recipients.
The scale is large. In 2023, the Pew Research Center counted 2.6 million asylum applicants, 650,000 people with Temporary Protected Status, and 600,000 DACA recipients.
Those figures do not indicate how many people would lose refunds, but they show why analysts say the policy could touch hundreds of thousands or more, according to CNBC.
The proposed rules include one important exception. For married couples filing jointly, only one spouse needs to be a citizen, national, or qualified alien for the couple to receive the refundable portion. That protects some mixed-status households, but it does not help individual filers or couples where neither spouse qualifies.
Prostock/Getty Images
What Treasury, critics say about the rule
“These proposed regulations end the abuse, protect the integrity of the tax system, and put Americans first,” Treasury Secretary Scott Bessent said in a press release. The Trump administration has framed the proposal as enforcement of existing law that has not previously been applied to tax credits.
Critics see it differently. Margot Crandall-Hollick, a senior research associate at the Urban-Brookings Tax Policy Center, said the rule would land hardest on lower-income workers and families. Those are the households most likely to receive most of the value of these credits as a refund rather than as a reduction in tax owed.
Consider what the rule means in practice. A worker pays payroll taxes all year. Withholding comes out of every paycheck. They file a federal return with a valid Social Security number.
Under the proposed rule, they still get no refund from credits designed to support work, education, or child-rearing. They paid in, but the credits do not pay them back.
This proposal did not arrive without context. The One Big Beautiful Bill Act, signed in July 2025, had already narrowed eligibility for Medicaid, Medicare, Affordable Care Act credits, the child tax credit, and food assistance, the Johns Hopkins Bloomberg School of Public Health noted.
The Treasury and IRS proposal now extends that effort into the tax code itself, according to analysis by the Brookings Institution.
What happens next and what affected taxpayers should know
The agencies will review public comments submitted before Oct. 5 and consider feedback from the Oct. 14 hearing before issuing any final rule. If finalized this year, the regulations would apply to tax returns for the 2026 tax year, filed in early 2027.
Taxpayers should not assume their eligibility has changed, since the rule is not yet finalized. Its final language, effective date, and scope could all change during the rulemaking process.
People who think they could be affected should retain income and work-authorization records and seek qualified tax guidance before filing their 2026 returns.
The public comment period is also an opportunity for affected individuals and organizations to submit written input on the proposal before the Oct. 5 deadline.
Related: Retirees can shield $210,000 from RMDs with this IRS-approved move
