A new rule proposed by the US Treasury Department would classify the refundable portion of many tax credits—the portion that exceeds taxes owed—as “federal public benefits” under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA).
Undocumented immigrants are already ineligible for most of these tax credits under current law. The rule would exclude other groups of people who are currently eligible, including Temporary Protected Status (TPS) holders, Deferred Action for Childhood Arrivals (DACA) recipients, pending asylum applicants with work authorization, U Visa holders, T visa holders, and some immigrants on work visas.
More broadly, the rule could carry costs for taxpayers that policymakers ought to consider.
Current tax code rules already exclude undocumented immigrants
The proposed rule would apply to the earned income tax credit (EITC), child tax credit (CTC), American Opportunity Tax Credit (AOTC), and adoption tax credit. Tax law dictates which noncitizens can claim these provisions, generally based on residency rules and taxpayer ID number requirements (the premium tax credit has historically had different rules) (Table 1).
Since the residency rules on their own do not exclude undocumented immigrants from eligibility for refundable tax credits, Congress has also required taxpayers and their qualifying children to have work-authorized SSNs to claim most refundable tax credits, first with the EITC in 1996, and then in 2017 and 2025 for the CTC, and 2025 for the AOTC. Since undocumented immigrants are ineligible for these SSNs, they are also ineligible for these credits.
Taxpayers, and the IRS, would face a more complicated filing process
The proposed rule would add another test on top of these existing rules: whether, on the date they file a tax return, a taxpayer falls within PRWORA's definition of a "qualified alien."
The IRS does not currently collect this information from taxpayers, and it’s not information that can be determined from an SSN. For spending programs, federal benefits administrators query an online service that can require up to three rounds of verification. But there is no indication the service’s data can be used for tax administration.
Tax preparers may similarly have difficulty determining whether an individual’s immigration status qualifies them as a “qualified alien” given tax preparer expertise is in tax law, not the complexities of immigration law. Eligible taxpayers may therefore lose out on tax credits because of an error or omission in paperwork, beyond the 200,000 to 700,000 taxpayers Treasury expects to be ineligible under the rule in tax year 2026.
Some eligible immigrant families may forgo claiming tax credits or filing altogether, fearing an error in declaring their qualified alien status could expose them to immigration consequences or criminal penalties. Already some of the administration’s action have resulted in reports of fewer immigrants filing returns.
Despite no state law changes, state tax credits may be affected
The proposed rule could have spillover effects for the many states with refundable tax credits that are wholly or partially based on credit claiming on federal tax returns. For example, many states calculate their residents’ EITC eligibility and credit amounts as a percentage of the federal EITC.
Proposed rule’s effects could extend beyond tax filing
Like other immigration actions including changes to the “public charge” rule, Treasury’s proposed rule could exacerbate fear and confusion, and lead many eligible immigrant families to forgo government benefits and services. This could have wide-ranging impacts on the well-being of children, including US citizen children, who live with immigrants who are allowed to live and work in the US.
