Under proposed regulations issued August 20, 2026 by the Treasury Department, tax residency under §7701(b) and a work-eligible Social Security number no longer settle whether a client can receive a refundable credit.
If finalized, there will be a third test drawn from immigration law: the taxpayer must be a U.S. citizen, a U.S. national, or a qualified alien under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA).
For example, an H-1B engineer who has passed the substantial presence test for years, files as a resident, and has a valid SSN would fail that test, as would a Deferred Action for Childhood Arrivals (DACA) recipient with work authorization.
If final regulations are issued, they will apply to tax years ending on or after the publication date; if they are issued by December 31, 2026, the new restrictions will apply to tax year 2026. Since the Treasury has already issued draft forms related to this change, it appears they intend for it to apply to tax year 2026.
Federal Public Benefit
PRWORA bars aliens who are not qualified aliens from receiving any Federal public benefit under 8 U.S.C. §1611(a). Treasury’s position in the proposed regulations is that the refunded portion of a refundable credit is a payment to an individual from appropriated funds and, therefore, a federal public benefit.
The refunded amount is the credit amount that exceeds the subtitle A income tax after applying certain nonrefundable credits. Subtitle A, which includes §1 through §1564 of the Code, includes income tax, self-employment tax, and the net investment income tax. Any refundable credit amount used to reduce the taxpayer’s tax liability is not affected by these proposed regulations.
Four credits are currently covered by the proposed regulations: the §23 adoption credit, the §24 child tax credit (including the additional child tax credit), the §25A American opportunity tax credit, and the §32 earned income tax credit.
Treasury also concluded that the refunded portions of the §36B premium tax credit and the new §6433 saver’s match are also Federal public benefits. Treasury will not apply PRWORA to the premium tax credit because the OB3 Act's narrower eligibility rules, effective for tax years beginning after December 31, 2026, supersede it. The Treasury will separately issue proposed regulations for the new §6433 saver’s match.
Who Can Receive the Refunded Portion?
U.S. citizens, U.S. nationals, and qualified aliens can receive the refunded portion of a refundable tax credit. Under 8 U.S.C. §1101(a)(22), a U.S. national is a non-citizen who owes permanent allegiance to the United States; in practice, a person born in American Samoa or Swains Island.
A qualified alien is defined in 8 U.S.C. §1641:
Lawful permanent residents,
Asylees granted asylum under INA §208,
Refugees admitted under INA §207,
Parolees under INA §212(d)(5) for a period of at least one year,
Aliens whose removal is being withheld under INA §243(h) or §241(b)(3),
Conditional entrants under INA §203(a)(7) as in effect before April 1, 1980,
Cuban and Haitian entrants under §501(e) of the Refugee Education Assistance Act of 1980,
Citizens of Micronesia, the Marshall Islands, and Palau lawfully residing in the U.S. under a Compact of Free Association,
Battered spouses, children, and their parents or children with an approved or pending petition and a substantial connection between the abuse and the need for the benefit, and
T nonimmigrant status holders and applicants with a prima facie case.
Who Cannot Receive the Refunded Portion?
Any alien not included in the above list is ineligible to receive the refunded portions of refundable tax credits, even with a valid SSN and resident alien status. This includes, but is not limited to:
Individuals without lawful status, including those in removal proceedings,
Nonimmigrants on temporary visas (H-1B, L-1, F-1, J-1, O-1, TN, E-2, etc.),
DACA recipients,
Temporary Protected Status holders,
Parolees admitted for less than one year,
Asylum applicants and withholding applicants whose cases are pending,
U nonimmigrant status holders, and
Adjustment of status applicants who have not yet been granted permanent residence.
Additional Considerations
On a married filing joint return, under Prop. Reg. §1.32-4(b)(4), if either spouse is a U.S. citizen, U.S. national, or qualified alien, the other spouse is treated as a qualified alien for the return. This rule applies to all of the refundable credits.
Status is determined on the filing date of the return that first claims the credit. If the original return claimed the credit when the taxpayer was ineligible, a later status change does not allow an amended return to recover the refunded portion. However, if the credit was not claimed on the original return, an amended return that first claims it after the taxpayer becomes a qualified alien is tested on the amended return's filing date. See Examples 4 and 5 across all four proposed regulations.
Each taxpayer claiming an affected credit must declare eligibility under penalty of perjury on the return; this declaration, along with the calculation of the refunded portion of all refundable credits, will be on new Schedule 3-A, Federal Public Benefit. The current draft allows filers to elect to forgo any refunded portions, which can help simplify return filings for certain religious groups that do not wish to receive these amounts.
The proposed regulations impose no PRWORA requirement on the qualifying child themselves; only the taxpayer (or one spouse) claiming the benefit on a tax return is tested.
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