Four Popular Tax Credits Could Soon Carry A New Refund Requirement
The federal government is considering new rules that would limit who may receive the refundable portion of four individual income tax credits.
The Treasury Department and IRS announced the proposal on August 19, saying it would clarify how a 1996 federal law applies to tax refunds generated by the affected credits. If finalized, the regulations would establish a separate eligibility standard for credit amounts paid to taxpayers after their federal income tax liability has been reduced to zero.
Four Tax Credits Are Included
The proposed rules would apply to the refundable portions of:
- The Child Tax Credit
- The Earned Income Tax Credit
- The American Opportunity Tax Credit
- The Adoption Tax Credit
Tax credits can affect a return in different ways. A nonrefundable amount can reduce a taxpayer’s federal income tax bill, but generally cannot produce a refund beyond the amount owed. A refundable credit can potentially result in an additional payment after the taxpayer’s income tax liability has been fully offset.
The proposal focuses exclusively on that additional refundable amount.
Eligibility Would Depend on Immigration Status
To receive the refundable portion of one of the affected credits, a taxpayer would need to be a U.S. citizen, U.S. national or “qualified alien” on the date the return first claiming the credit is filed.
Qualified aliens can include lawful permanent residents, refugees, people granted asylum and certain other groups recognized under federal law.
Taxpayers would also be required to certify their eligibility on the return under penalty of perjury. For couples filing jointly, the requirement could be satisfied if at least one spouse meets the applicable citizenship or immigration-status standard.
Some Tax Benefits Could Still Be Available
The proposed regulations would not necessarily prevent an otherwise eligible taxpayer from using one of the four credits to reduce federal income tax owed.
Instead, the restriction would apply to the combined refundable amount exceeding the taxpayer’s income tax liability for the year. Someone who does not meet the proposed standard for receiving that excess amount might still qualify for the portion of a credit used to offset taxes.
That distinction could be particularly important for households that qualify for multiple refundable credits on the same return.
The Rules Are Not Yet Final
The announcement is a regulatory proposal, not an immediate change to completed tax returns.
Treasury and the IRS are accepting public comments and requests for a public hearing before issuing final regulations. If adopted, the rules would apply to tax years ending on or after the date the final version is formally published.
Because eligibility would be determined when the return first claiming the credit is filed, taxpayers potentially affected by the proposal may want to monitor its progress and obtain professional guidance before filing.
Source: U.S. Department of the Treasury
