Trump tax proposal could reshape refunds in $3B claim

Trump administration highlights proposed tax change

The Trump administration highlighted proposed regulations from the Department of the Treasury and the Internal Revenue Service that would change eligibility for refunded portions of four federal tax credits.

The proposal would classify those refunded amounts as federal public benefits under a 1996 law, adding another eligibility test without eliminating the underlying credits for otherwise qualifying taxpayers.

The 1996 law behind the proposal

The proposal relies on the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which limits certain federal public benefits to citizens, nationals, and qualified immigrants.

Treasury and the Internal Revenue Service would apply that statute to specified refundable amounts, using immigration status to determine whether taxpayers may receive money in excess of their income tax liability.

What refundable credits mean

Refundable credits can exceed a taxpayer’s federal income tax liability, creating an amount available for refund, credit against federal tax debts, or certain other authorized offsets after filing.

Under the proposal, an otherwise eligible taxpayer who fails the immigration status test could still use affected credits against income tax liability, but could not receive any excess refundable amounts.

Four tax credits are covered

The proposal would cover the adoption tax credit, Child Tax Credit, American Opportunity Tax Credit, and Earned Income Tax Credit when those programs produce refundable amounts for taxpayers.

Existing eligibility rules for each credit would remain unchanged. The proposal adds a separate federal public benefit test only for amounts exceeding a taxpayer’s qualifying income tax liability.

The $3B claim explained

The Trump administration promoted claims that the change could save taxpayers about $3B. At the same time, the official regulatory estimate puts the amount of potentially disallowed refundable credits below that widely cited figure.

The estimated affected amount is $700M to $2.6B for tax year 2026, based on an average refundable benefit of roughly $3,656 per affected return.

Millions could claim affected credits

About 49 million federal individual income tax returns are projected to claim at least one affected credit for tax year 2026 under existing eligibility requirements and related rules.

Among those returns, an estimated 24 million would include a refundable amount that would be treated as a federal public benefit under the proposed regulations if they become final as written.

Estimates show a smaller group

Regulatory estimates place roughly 200,000 to 700,000 taxpayers outside the proposed qualified immigrant test for tax year 2026, representing about 0.8% to 2.8% of affected refundable tax claims.

That range remains approximate because direct data on each taxpayer’s qualified immigrant status are unavailable, and the estimate does not account for potential behavioral changes following final regulatory action.

Who would remain eligible?

U.S. citizens, U.S. nationals, and qualified immigrants would remain eligible for refunded amounts if they satisfy the separate tax requirements governing each affected credit under the proposed regulations.

Qualified immigrants include lawful permanent residents, refugees, asylees, and certain other categories defined under federal law, so that the restriction may also affect some people with lawful presence.

Little-known fact: The One Big Beautiful Bill Act made the Opportunity Zone tax incentive permanent.

Legal presence may not be enough

Some people legally present in the United States may not meet the 1996 law’s definition of a qualified immigrant, despite authorization to work or remain temporarily in the country.

Those taxpayers could lose the refundable portion under the proposal while retaining any nonrefundable amount they otherwise qualify to use against federal income tax liability under existing tax rules.

Joint returns get separate treatment

For married couples filing jointly, the proposal would require only one spouse to be a U.S. citizen, U.S. national, or qualified immigrant when claiming an affected refundable amount.

That joint return provision means a couple may satisfy the proposed public benefit requirement even when only one filer holds a qualifying status recognized under the 1996 federal law.

Taxpayers would certify their status

Taxpayers claiming an affected refundable amount would need to declare, under penalty of perjury, that they meet the citizenship, nationality, or qualified immigrant requirement when filing federal returns.

The status test would use the date a taxpayer first claims the credit for that tax year, including an initial return, amended return, or qualifying late tax filing.

Refundable amounts can reach thousands

The 2026 Earned Income Tax Credit can reach $8,231 for eligible taxpayers with 3 or more qualifying children, while other affected credits carry different maximum refundable benefit limits.

The American Opportunity Tax Credit can provide up to $1,000 in a refundable tax credit per eligible student. In comparison, the 2026 adoption tax credit allows up to $5,120 in a refundable tax credit per eligible child.

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The proposal still faces review

The proposal remains under review. Written comments are due October 5, 2026, while a public hearing is scheduled for October 14, 2026, if qualifying speaker outlines are submitted by the deadline.

If finalized, the regulations would apply to tax years ending on or after publication of the final rules, making the eventual publication date central to determining taxpayer impact.

Wondering why Congress stepped into DC’s tax debate? See which policies lawmakers halted and which changes now face uncertainty.

What do you think about the Trump administration’s claim that a proposed tax rule could save $3B? Share your thoughts in the comments.

This slideshow was made with AI assistance and human editing.

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