The Department of the Treasury and the Internal Revenue Service have issued proposed regulations that would clarify eligibility requirements for the refunded portions of certain individual income tax credits, according to an official IRS announcement designated IR-2026-93.
The proposed rules seek to strengthen enforcement of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), a federal law that limits access to federal public benefits to U.S. citizens, U.S. nationals, and qualified aliens. Treasury and the IRS are now proposing that the refunded portions of certain refundable tax credits constitute federal public benefits under that law.
Four Tax Credits Are Included in the Proposal
Four specific tax credits are covered by the proposal: the adoption tax credit, the child tax credit, the American Opportunity Tax Credit, and the Earned Income Tax Credit (EITC). Importantly, the proposed rules apply only to the refunded portion of these credits — defined as the amount by which the combined eligible credits exceed a taxpayer’s income tax liability for the year. Taxpayers who do not qualify to receive the refunded portion may still use the non-refunded portion of an applicable credit to offset their income tax liability, according to the announcement.
The proposal follows a legal analysis by the Department of Justice’s Office of Legal Counsel concluding that refunded portions of the affected credits qualify as federal public benefits under PRWORA. Treasury Secretary Scott Bessent and IRS Chief Executive Officer Frank J. Bisignano both issued statements indicating the rules are intended to direct these benefits to eligible taxpayers and protect the integrity of the tax system.
This would not necessarily eliminate the entire value of an affected tax credit for someone who does not meet the proposed eligibility requirements. Treasury and the IRS are distinguishing between the portion used to reduce federal income tax liability and the refundable amount that can result in money being paid to a taxpayer beyond that liability. The proposed PRWORA restrictions would apply to the latter.
The Rules Are Not in Effect Yet
If finalized, the regulations would take effect for tax years ending on or after the date the final regulations are published. No final effective date has been set, as the rules are still in the proposed stage.
Treasury and the IRS have invited public comments and requests for a public hearing on all aspects of the proposed regulations. Instructions for submitting comments are included in the proposed regulations.
The EITC in particular is widely used by lower- and middle-income working households, making these proposed changes potentially significant for a broad segment of taxpayers and tax filers who claim refundable credits.
Readers with questions about their specific eligibility for any of the affected credits should consult the IRS website at IRS.gov or speak with a qualified tax professional, as individual circumstances vary.
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Amanda Blankenship is the Chief Editor for District Media. With a BA in journalism from Wingate University, she frequently writes for a handful of websites and loves to share her own personal finance story with others. When she isn’t typing away at her desk, she enjoys spending time with her daughter, son, husband, and dog. During her free time, you’re likely to find her with her nose in a book, hiking, or playing RPG video games.
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