On August 20, 2026, the U.S. Treasury Department (Treasury) and the Internal Revenue Service (IRS) released proposed regulations that would limit eligibility for the refunded portion of four federal income tax credits: the Adoption Tax Credit, the Child Tax Credit, the American Opportunity Tax Credit, and the Earned Income Credit. The proposed rules classify the refunded portion of these credits as a “Federal public benefit: under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), making them unavailable to individuals who are not U.S. citizens, U.S. nationals, or “qualified aliens.”1
WHY THIS MATTERS
Although some inbound assignees to the United States may be treated as U.S. residents for tax purposes and otherwise eligible to claim these tax credits, the proposed regulations would add a separate immigration-status requirement for the refundable portion of the credits. Because many inbound assignees hold temporary nonimmigrant visas, such as L-1 or H-1B visas, they generally would not meet the proposed definition of “qualified alien,” even if they are U.S. tax residents.
As a result, nonimmigrant visa holders who may previously have been eligible for refundable tax credits would generally be ineligible for the refundable portion of those credits under the proposed regulations, if finalized, potentially increasing tax equalization costs for employers with tax equalization or tax protection programs.
Background
PRWORA restricts aliens who are not “qualified aliens” from receiving certain “Federal public benefits.” The definition of a “qualified alien” is narrow and includes individuals such as those lawfully admitted for permanent residence (e.g., green card holders), refugees and asylees. It does not include temporary nonimmigrant visa holders.2 Under the proposed regulations, the amount of the credit that exceeds the tax liability is the “refunded portion” proposed to be classified as a “Federal Public benefit.”
The proposed regulations would apply PRWORA eligibility limitations to the following credits:
- The Adoption Tax Credit (IRC § 23),
- The Child Tax Credit (IRC § 24),
- The American Opportunity Tax Credit (IRC § 25A), and
- The Earned Income Credit (IRC § 32).
The proposed regulations provide that while non-qualified aliens can still use these credits to offset their U.S. income tax liability, they are ineligible to receive a refund for any credit amount that exceeds that tax liability.
For married individuals filing a joint return, the proposed regulations provide that if at least one spouse is a U.S. citizen, U.S. national, or “qualified alien,” the couple would be eligible to receive the full refunded portion of the credits.
As part of the implementation process, taxpayers would be required to self-certify their status as a U.S. citizen, U.S. national, or “qualified alien” on their tax returns. The IRS plans to update its forms and instructions to facilitate this process.
KPMG INSIGHTS
Although the proposed regulations introduce an immigration-status-based limitation on the refundable portions of the tax credits, the practical impact may be limited. Eligibility for the affected credits is already subject to numerous requirements, and many assignees may not qualify because of income levels or other credit-specific rules.
However, the proposal could affect a subset of employees, particularly those with lower incomes, qualifying children, adoption expenses, or education expenses who otherwise would have been eligible for a refundable credit. Employers with tax equalization programs may need to assess whether any inbound assignees currently benefit from the credits, as the loss of those benefits may increase assignment costs if the proposed regulations are finalized.
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Disclaimer
The above information is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
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