The Internal Revenue Service and the Department of the Treasury have issued a notice of proposed rulemaking that would classify the refunded portion of certain federal refundable tax credits as a “Federal public benefit” under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). The proposal was published in the Federal Register on August 20, 2026.
Four Tax Credits Would Be Affected
Under the proposed rule, individuals who are not considered “qualified aliens” under PRWORA would become ineligible to receive the refundable portion of four specific federal income tax credits: the adoption tax credit, the American Opportunity Tax Credit, the child tax credit, and the earned income credit. The non-refundable portions of these credits are not addressed by the proposal; only the amounts that would otherwise be paid out as a refund to the taxpayer are at issue.
Who Would Meet the Proposed Eligibility Standard?
PRWORA, enacted in 1996, generally restricts certain federal public benefits based on immigration status. Its definition of a “qualified alien” includes categories such as lawful permanent residents, refugees, asylees, and certain other noncitizens who meet statutory requirements. Because immigration classifications can be complicated, taxpayers should not determine their eligibility based solely on a general list in a news article.
The Proposal Applies to Refundable Amounts, Not Every Dollar of the Credit
The IRS stated it is issuing the proposed rule under authority granted by section 7805(a) of the Internal Revenue Code, as well as section 404 of PRWORA, which requires federal agencies administering a federal public benefit to notify the public and benefit recipients of any eligibility changes.
The proposed rule is identified as REG-119882-25 and covers amendments to 26 CFR Part 1 under Internal Revenue Code sections 23, 24, 25A, and 32, which govern the adoption tax credit, child tax credit, American Opportunity Tax Credit, and earned income credit, respectively.
The distinction between a refundable and nonrefundable tax credit matters. A nonrefundable credit can generally reduce the federal income tax someone owes, while a refundable amount can potentially result in money being paid to the taxpayer beyond their income-tax liability. Under the proposal, it is the refunded portion of the affected credits that would be treated as a federal public benefit under PRWORA. The proposal therefore should not be described as making affected taxpayers completely ineligible for all four tax credits.
Nothing Changes for Taxpayers Yet
The IRS has set a public comment deadline of October 5, 2026. A public hearing has been scheduled for October 14, 2026, though it will be cancelled if no requests to speak are received by the October 5 deadline. Requests to attend the hearing must be submitted by 5 p.m. ET on October 9, 2026. Comments may be submitted electronically through the federal rulemaking portal at regulations.gov using docket number REG-119882-25, or by mail to the IRS address specified in the Federal Register notice.
The proposal could be particularly important for households that qualify for refundable credits even when their federal income-tax liability is relatively low. For example, someone might use part of an eligible credit to reduce their tax liability to zero and potentially receive another portion as a refund. Under the proposed framework, PRWORA eligibility would affect the refunded amount rather than automatically eliminating the entire underlying credit. Taxpayers should not change how they file based solely on the proposal because it has not been finalized.
Because this is a proposed rule, it has not yet taken effect. Taxpayers and advisors who may be affected by changes to eligibility for these credits should monitor the rulemaking process and verify their specific circumstances directly with the IRS or a qualified tax professional.
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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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