IRS to Restrict Refundable Tax Credits for Some Immigrants
On August 19, the U.S. Department of the Treasury and the IRS published proposed new rules that would restrict access to the refundable portion of several federal tax credits for noncitizens who do not qualify as a qualified alien under PRWORA.
The restrictions apply to:
- Additional Child Tax Credit
- Earned Income Tax Credit (EITC)
- American Opportunity Tax Credit (AOTC)
- Adoption Tax Credit
It is important to understand that this does not apply to a regular refund of taxes you overpaid.
The restriction applies when, after taxes and credits are calculated, the IRS pays you additional money beyond your tax liability.
For example, if you owe $1,000 in federal income tax but qualify for a $3,000 refundable tax credit, the first $1,000 covers your tax liability and the remaining $2,000 is paid to you by the IRS. That $2,000 is the refundable portion of the credit that would be subject to the new restrictions.
Who will still be eligible for these payments:
- U.S. citizens;
- U.S. nationals;
- lawful permanent residents, or green card holders;
- individuals who have already been granted asylum;
- refugees;
- individuals granted parole for at least one year;
- individuals granted withholding of removal;
- certain other categories specifically listed under PRWORA.
The new rule applies not only to undocumented immigrants. For example, TPS or a pending asylum application by itself does not make a person a qualified alien for these purposes if the person does not have another qualifying status.
There is an important exception for Ukrainians: parole granted for at least one year is included in the definition of qualified alien. Therefore, most Ukrainians with valid U4U parole or another qualifying parole would not be affected by this restriction as long as they continue to meet the applicable requirements.
For a joint tax return, Married Filing Jointly, it is enough for one spouse to be a U.S. citizen, U.S. national, or qualified alien.
The IRS also plans to require taxpayers to confirm their immigration status when claiming the refundable portion of these credits.
According to Treasury and IRS estimates, the changes could affect approximately 200,000 - 700,000 taxpayers, with approximately $0.7 - $2.6 billion per year in refundable credits no longer being paid.
The rule was published as a proposed rule and must go through the standard process before a final version is published. The main framework has already been established: refundable tax credit payments will be available only to U.S. citizens and certain categories of qualified aliens.
Sources:
U.S. Department of the Treasury
IRS / Federal Register - Proposed Rule REG-119882-25
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