Today the Trump administration proposed new regulations seeking to drastically reduce the tax credits that certain immigrant tax filers can claim. The proposal from the Treasury Department and IRS would bar those families from receiving the refundable portion of four different tax credits—that is, the part of those credits that exceeds their federal individual income tax liability. The affected credits include the Earned Income Tax Credit (EITC), Additional Child Tax Credit, American Opportunity Tax Credit, and the Adoption Tax Credit.
Here are five big-picture observations about what the regulations would do and what is at stake.
1. These regulations are aimed squarely at lawfully present immigrants.
Most of the credits impacted by this regulation already include strict requirements that claimants file using a Social Security Number. Because of this, fully undocumented immigrants are already typically barred from accessing these credits. The practical effect of these regulations, then, would be to strip away credits from lawfully present immigrants.
DACA recipients, also known as Dreamers, may be the most widely known group that would confront financial harm under this proposal. Other affected groups include immigrants with Temporary Protected Status, asylum applicants, and victims of serious crimes holding U visas.
To enforce these new restrictions, the IRS says it would begin asking everyone who claims these four credits (a group that includes roughly 49 million families) whether they are a “U.S. citizen, U.S. national, or qualified alien.” This would be the first time the IRS has ever asked taxpayers to report their citizenship status on their tax forms, which could lead to a chilling effect that discourages tax filing among immigrant families.
2. The impact on affected families would be severe.
ITEP has not analyzed the full impact of these regulations, and the Treasury Department and IRS admit they “do not have data… to precisely estimate the number of affected taxpayers.” That said, the documents released today include suggestive evidence that the average impacted family could face a financial loss of over $3,000 per year. A policy shift of this magnitude would have a material impact on many of these families’ ability to meet their basic needs.
3. The administration is seeking tax credit limitations that are far harsher than what Congress has legislated.
Today’s release includes an illuminating discussion of why Treasury and IRS ultimately decided not to include the Premium Tax Credit (PTC), which helps moderate- and middle-income Americans pay for healthcare, within the scope of these regulations. In their telling, in prior legislation “Congress specifically addressed immigration status as it relates to the computation of and eligibility for the PTC.” While true, this observation is equally applicable to other tax credits covered by the proposal.
Congress added new Social Security Number requirements to the Additional Child Tax Credit and American Opportunity Tax Credit just last year, for instance. In both cases, these requirements were aimed squarely at restricting access by certain immigrant groups. In the case of the Additional Child Tax Credit, this is the second time that Congress has legislated on this question in just the last nine years. The EITC, similarly, also includes strict Social Security Number requirements created explicitly by Congress.
The idea that Congress has already addressed immigration status under the Premium Tax Credit but not under these other tax credits is strained reasoning at best.
4. The rationale for treating refundable credits differently from nonrefundable ones is flawed.
The regulations would allow affected taxpayers to continue claiming these tax credits to the extent they are used to offset individual income tax liability but would not allow for any credit claims that go beyond that liability. The regulations assert that a refunded credit is different from what is used to offset income taxes paid because a refunded credit “goes beyond a return of money paid by the taxpayer to the federal government.”
But this argument conveniently ignores the fact that the affected taxpayers also pay substantial payroll taxes and that, as a result, in many (perhaps even most) cases the refunded amount does not actually exceed the total amount of money paid by the taxpayer to the federal government.
It is widely understood that one of the major goals of the EITC, in particular, has long been to offset federal payroll taxes. Treasury and IRS’s assertion that it can ignore these payroll taxes when measuring whether a refundable credit “goes beyond a return of money paid… to the federal government” is therefore highly problematic.
5. These regulations have the potential to also change state tax policy and will require debate in statehouses across the country.
Most states offer EITCs that piggyback on federal EITC eligibility rules to a substantial degree. If the Trump administration drastically reduces the amount of EITC that certain lawfully present immigrants can claim, there is a real risk that those immigrants will also face an automatic reduction in their state EITCs as well—an outcome that would magnify the substantial financial harm they face.
ITEP has written about how these regulations would be a poor fit for state tax codes because, among other things, they would reduce each family’s tax credit based on a complex federal tax calculation that has no bearing on state income tax law. In other words, the mechanism that the Trump administration would use to end refundability for these families at the federal level would not translate into ending refundability at the state level. Instead, it would usher into effect what are essentially arbitrary levels of EITC cuts in the states.
For this reason and others, it is likely that many states will look seriously into breaking with the administration’s proposed new EITC restrictions.
Looking ahead
These proposed regulations take a hardline stance toward administration of the tax law as it affects lawfully present immigrants. Congress has repeatedly declined to adopt the punitive measures being pursued by the Trump administration under these proposed regulations, despite ample opportunity for it to have done so.
For now, the regulations are still just a proposal without any legal effect, though the administration appears to be quite serious about its push for these new restrictions. It remains to be seen what Treasury and IRS will finalize after public comments are submitted, and whether these regulations will ultimately withstand a likely legal challenge.
