The Department of the Treasury and the Internal Revenue Service (IRS) have issued proposed regulations aimed at clarifying eligibility requirements for certain refundable individual income tax credits.
The proposal is intended to strengthen enforcement of federal law and ensure that tax benefits funded by taxpayers are provided only to individuals who are legally eligible to receive them.
The proposed regulations focus on provisions of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) and clarify which portions of certain refundable tax credits are considered federal public benefits.
Why the New Rules Are Being Proposed
Under PRWORA, federal public benefits are generally limited to U.S. citizens, U.S. nationals, and qualified aliens.
Treasury and the IRS are proposing regulations to clarify that the refunded portion of certain refundable individual income tax credits qualifies as a federal public benefit under the law.
The proposal follows legal analysis from the Department of Justice’s Office of Legal Counsel concluding that the refunded portions of the affected tax credits are federal public benefits.
According to Treasury and the IRS, the proposed rules are intended to prevent individuals who are barred by federal law from receiving these benefits from claiming the refundable portions of the credits.
Four Tax Credits Covered by the Proposal
The proposed regulations would apply PRWORA eligibility requirements to four individual income tax credits:
- Adoption Tax Credit
- Child Tax Credit
- American Opportunity Tax Credit
- Earned Income Tax Credit (EITC)
To receive the refunded portion of one of these credits, a taxpayer would generally need to meet specific eligibility requirements.
Who Would Qualify?
Under the proposed regulations:
- The taxpayer must be a U.S. citizen, U.S. national, or qualified alien when filing the federal income tax return that first claims the affected credit.
- The taxpayer must declare under penalty of perjury on the tax return that they are eligible to receive the refunded portion of the credit.
- For taxpayers filing a joint return, only one spouse would need to be a U.S. citizen, U.S. national, or qualified alien.
Qualified aliens include certain groups specified under PRWORA, including lawful permanent residents, asylees, and refugees, among others.
What Counts as the Refundable Portion?
The proposed regulations distinguish between the portion of a credit that reduces a taxpayer’s federal income tax liability and the portion that is actually refunded.
Only the refunded portion of an affected credit would be treated as a federal public benefit.
The refunded portion is generally the amount by which the total affected refundable credits exceeds the taxpayer’s income tax liability for the tax year.
A taxpayer who does not qualify to receive the refunded portion could still claim any portion of an affected credit for which they otherwise qualify that offsets their federal income tax liability.
When Would the Rules Take Effect?
The proposed regulations would apply to tax years ending on or after the date the regulations are published as final regulations.
Because these are currently proposed regulations, they are not yet final. Treasury and the IRS are seeking public input before the rules are finalized.
Public Comments and Hearing
Treasury and the IRS will accept public comments and requests for a public hearing regarding all aspects of the proposed regulations.
The proposed regulations contain complete instructions for submitting comments and requesting a hearing.
Taxpayers and other interested parties can review the proposed regulations for additional details and instructions.
What Taxpayers Should Know
The proposed regulations would establish additional eligibility requirements for the refundable portions of four federal tax credits. Importantly, the proposal distinguishes between refundable amounts and portions of credits that simply reduce a taxpayer’s tax liability.
Until the regulations are finalized, taxpayers should review official IRS guidance for the rules that currently apply to their individual tax situations.