The Treasury Department and the IRS published a proposed rule in the Federal Register on Aug. 20, 2026 that would bar hundreds of thousands of lawfully present foreign nationals — including H-1B, L-1, TN, O-1 and F-1 visa holders — from receiving the refundable portion of four major federal tax credits.
The rule, designated REG-119882-25 (RIN 1545-BS06), appears at 91 FR 53812. It would classify the refunded portion of the adoption tax credit, the child tax credit, the American opportunity tax credit and the earned income credit as a Federal public benefit under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). Under 8 U.S.C. 1611(a), noncitizens who are not qualified aliens are ineligible for federal public benefits.
The definition is the whole story. PRWORA’s term qualified alien, defined at 8 U.S.C. 1641(b), covers lawful permanent residents, asylees, refugees, people paroled into the United States for at least one year, those granted withholding of removal, certain conditional entrants, Cuban and Haitian entrants, and COFA residents. It does not cover temporary work visa holders. An H-1B engineer who has paid full federal income tax for a decade is not a qualified alien. Neither is an L-1 manager, a TN professional, an O-1 researcher, or a student on F-1. Critically, neither is someone with a pending Form I-485 who has not yet received the green card.
What is actually lost. The proposed regulations reach only the refunded portion — the amount that exceeds the taxpayer’s liability and generates an overpayment under 26 U.S.C. 6401(b)(1). A nonqualified alien could still use the credits to reduce federal income tax owed, dollar for dollar, down to zero. What disappears is the check. For families claiming the Additional Child Tax Credit, that is up to $1,700 per child; the American opportunity credit is 40% refundable, up to $1,000.
How many people. Treasury and the IRS put the number in the rule itself. They estimate 49 million returns will claim at least one of the four credits for tax year 2026, of which about 24 million will claim an amount that produces a refund. Of those 24 million, the agencies estimate that 200,000 to 700,000 taxpayers — 0.8% to 2.8% — would be ineligible because they do not meet PRWORA’s qualified alien requirement. The rule acknowledges this is a rough estimate, noting there is no direct data on taxpayers’ qualified alien status.
Timing. Written and electronic comments are due by Oct. 5, 2026, submitted through regulations.gov under REG-119882-25. A public hearing is scheduled for Oct. 14, 2026. The regulations are proposed to apply for taxable years ending on or after the date a final rule is published — so they would not affect returns already filed, but could reach the 2026 tax year if finalized before Dec. 31.
For employment-based green card applicants, the practical takeaway is that the tax consequences of the gap between filing and approval are widening. Someone waiting years in the EB-2 or EB-3 backlog with an approved I-140 and a pending I-485 remains a nonqualified alien for PRWORA purposes for that entire period, regardless of how long they have worked and paid taxes in the United States.
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