Legal Authority for Aliens to Claim Refundable Tax Credits: In Brief
Released: 2015-12-01T00:00:00

D etermining whether aliens who enter or remain in the United States in violation of federal immigration law (called unlawfully present aliens for purposes of this report) are permitted to claim refundable tax credits under federal law requires answering two questions. The first is whether these individuals may claim the credits under the Internal Revenue Code (IRC). The second is whether any refundable tax credits are "Federal public benefits" under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), in which case it could be argued that any such credit should be disallowed to unlawfully present aliens regardless of whether the IRC contains such a restriction. This report first provides a list of refundable tax credits and then examines these two questions.

Refundable Tax Credits

Tax credits reduce a taxpayer's tax liability dollar-for-dollar, up to the value of the credit. Refundable credits, unlike nonrefundable credits, can be larger than a taxpayer's income tax liability, with the taxpayer receiving the difference as a cash payment from the IRS in the form of a tax refund. Table 1 lists the current and recently expired refundable tax credits. A list of CRS reports that provide information on these credits can be found in the Appendix to this report.

Eligibility Under the IRC

The first question in determining whether unlawfully present aliens may claim refundable tax credits is whether this is permitted under the Internal Revenue Code (IRC). There is no general rule in the IRC that prohibits unlawfully present aliens from claiming refundable tax credits. Rather, the restrictions that exist are established on a credit-by-credit basis. As discussed below, there are three types of restrictions: (1) prohibitions on nonresident aliens (defined below) from claiming a credit; (2) requirements that taxpayers provide Social Security numbers (SSNs) in order to claim a credit; and (3) a restriction that only aliens who are "lawfully present" may claim a credit.

Prohibitions on Nonresident Aliens

Some credits are denied to nonresident aliens, and thus any unlawfully present alien who is a nonresident alien would be ineligible to claim them. For purposes of federal income tax law, individuals who are not U.S. citizens are classified as being either a resident or nonresident alien. In general, an individual is a resident alien if he or she is a lawful permanent resident (LPR) at any time during the year or is present in the United States for a significant period of time during the current and previous two years ("substantial presence test"). In general, other noncitizens are nonresident aliens. Unlawfully present aliens are categorized as either a resident or nonresident alien under these same rules.

As shown in Table 2 , only two existing credits—the EITC and American Opportunity tax credit—contain provisions denying the credit to nonresident aliens. Two recently expired credits—the Making Work Pay credit and the 2008 stimulus credit—were denied to nonresident aliens, and the now-expired First-Time Homebuyer credit was not available for purchases by nonresident aliens.

SSN Requirement

Some credits are denied to taxpayers without Social Security numbers (SSNs).

Credits With an SSN Requirement

As shown in Table 2 , only the EITC currently contains an SSN requirement. In order to claim the EITC, taxpayers must provide SSNs for themselves, a spouse if filing a joint return, and any qualifying children. The SSNs must be valid for work purposes (i.e., the SSN holder is authorized to work in the United States). Some aliens have SSNs that are issued for non-work purposes, but individuals with these types of SSNs may not claim the EITC.

The now-expired Making Work Pay and 2008 stimulus credits contained SSN requirements, although they did not specify that the SSN be valid for work purposes. Also, for the 2008 stimulus credit, the SSN requirement did not apply to a joint return if at least one spouse was a member of the Armed Forces during the taxable year.

One issue that arises with SSN requirements for tax credits is that some resident aliens who are currently not lawfully present may have once lawfully received an SSN and could attempt to use the SSN to claim a credit. While the statutory language is silent on this matter, it appears Congress intended to limit the EITC and 2008 stimulus credit to taxpayers currently authorized to work in the United States.

Credits Without an SSN Requirement

For the other refundable credits, such as the additional child tax credit, taxpayers may claim the credit using an SSN or an individual taxable identification number (ITIN). ITINs are issued by the IRS to taxpayers who are not eligible for SSNs. ITINs are unique identifying numbers that these individuals use to file tax returns and otherwise comply with their federal tax law responsibilities. Being assigned an ITIN does not affect an individual's immigration status, and unlawfully present aliens may receive ITINs.

SSNs and Residency Status

A legal requirement that a taxpayer provide an SSN in order to claim a credit is not duplicative of a restriction that denies nonresident aliens from claiming the credit. Having an SSN or ITIN does not denote whether an individual is a resident or nonresident alien. Some resident aliens are ineligible for SSNs and therefore have ITINs, while some nonresident aliens have SSNs.

Requirement that Aliens Be "Lawfully Present"

Under the Patient Protection and Affordable Care Act ( P.L. 111-148 , ACA), individuals who buy health insurance through an exchange are eligible for a refundable premium assistance tax credit. Aliens who are not "lawfully present," as that term is defined in regulations implementing ACA, are ineligible for the credit. This is because the credit is only available for months during which a person purchases health insurance through the ACA exchanges, and aliens who are not "lawfully present" are prohibited from buying insurance through an exchange. However, an individual who is not "lawfully present" may claim the credit for an eligible family member (for example, a parent who is not "lawfully present" may file a tax return claiming the credit if he or she has children who meet the credit's qualifications).

Eligibility Under PRWORA

The second question is whether any refundable tax credits are subject to Section 401 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), which generally bars unlawfully present aliens from receiving any "Federal public benefit." If any refundable tax credit is such a benefit, it could be argued that aliens subject to Section 401's restrictions may not claim the credit, regardless of whether the IRC contains such a prohibition. "Federal public benefit" is defined in Section 401(c)(1) as,

(A) any grant, contract, loan, professional license, or commercial license provided by an agency of the United States or by appropriated funds of the United States; and (B) any retirement, welfare, health, disability, public or assisted housing, postsecondary education, food assistance, unemployment benefit, or any other similar benefit for which payments or assistance are provided to an individual, household, or family eligibility unit by an agency of the United States or by appropriated funds of the United States.

It appears the IRS permits unlawfully present aliens to claim any refundable tax credit that is not restricted under the IRC. In other words, while the IRS has not released a public statement or guidance on this issue, it appears the agency does not consider any refundable tax credits to be subject to Section 401.

No court has examined the issue of whether refundable tax credits are federal public benefits under PRWORA. So long as the IRS permits unlawfully present aliens to claim any credit without an IRC restriction, there is a question as to whether that position could be challenged in court. This is because it appears doubtful that anyone would be personally injured—a necessary prerequisite to have standing to sue —by the IRS's decision to allow the credit. Thus, if the IRS does not interpret Section 401 to include refundable tax credits, this could be a de facto permissible interpretation by the agency, unless Congress were to address the matter legislatively.

If the issue were to come before a court, there appears to be support for the IRS's apparent determination that refundable credits are not federal public benefits. For example, Section 401 does not expressly include refundable tax credits, and it could therefore be argued that Congress did not include them in the list of federal public benefits because it understood them to be excluded. One could also argue that refundable tax credits are not federal public benefits because tax benefits are not traditionally thought of as the types of "grants" or qualifying "benefits" referred to in Section 401, and there is no clear evidence in the legislative history that Congress intended such credits to be treated as such.

Additional support could be found in PRWORA Section 432(a), which directs the Attorney General to consult with the Secretary of Health and Human Services when promulgating regulations for verifying the immigration status of applicants for federal benefits, but does not require consultation with the Treasury Department, thus arguably suggesting tax benefits were understood not to be affected. Support might also be found in other congressional action: Congress included in PRWORA an SSN requirement for the EITC and subsequently enacted legislation to impose an SSN requirement for the 2008 stimulus and Making Work Pay credits and to deny the premium assistance credit to unlawfully present aliens. These actions would arguably be unnecessary had Congress believed that PRWORA Section 401 applied to refundable tax credits.

On the other hand, it might be argued that at least some refundable tax credits could be a "grant" under Section 401(c)(1)(A) or a "benefit" under Section 401(c)(1)(B). Since the key terms are not defined statutorily nor do they appear to be terms of art (i.e., have a generally accepted meaning in law), a court might look to their customary and ordinary meanings. In general, "grant" is defined as "a sum of money given by an organization, especially a government, for a particular purpose"; "benefit" is "a payment made by the state or an insurance scheme to someone entitled to receive it"; and "assistance" is "the provision of money, resources, or information to help someone." Furthermore, in other contexts, courts have interpreted "other similar benefits" in PRWORA to mean services that "assist people with economic hardship" or could potentially "create [an] incentive for illegal immigration."

These definitions might support the argument that some refundable tax credits could be federal public benefits due to their refundable nature and purpose. Such a determination would likely depend on the specific characteristics of each credit. For example, in other contexts, courts have held the EITC to be public assistance for purposes of state law because of its refundable, grant-like nature and purpose of assisting low-income families. However, some courts have held that the child tax credit is not such a benefit since, unlike the EITC, it is not limited to assisting low-income families. As these cases illustrate, a court might not reach the same conclusion for each credit, concluding that some would meet the criteria while others would not, depending on the specific characteristics of each credit.

There appears to be justification for concluding that refundable tax credits are not federal public benefits under PRWORA Section 401, but there is also arguably support for determining that some might be, depending on their characteristics and purpose. Until the IRS, a court, or Congress addresses whether any refundable credits are federal public benefits, the only clear restrictions on the ability of aliens to claim them are those found in the IRC (see Table 2 ).

CRS Reports on Refundable Tax Credits

The following CRS reports provide information on specific refundable tax credits:

Earned Income Tax Credit: CRS Report R43805, The Earned Income Tax Credit (EITC): An Overview , by [author name scrubbed] and [author name scrubbed]. Additional Child Tax Credit: CRS Report R41873, The Child Tax Credit: Current Law and Legislative History , by [author name scrubbed]. American Opportunity Tax Credit: CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects , by [author name scrubbed]. Health Coverage Tax Credit: CRS Report RL32620, Health Coverage Tax Credit , by [author name scrubbed]. Making Work Pay Credit: CRS Report R40969, Withholding of Income Taxes and the Making Work Pay Tax Credit , by [author name scrubbed]. Adoption Tax Credit: CRS Report RL33633, Tax Benefits for Families: Adoption , by [author name scrubbed] First-Time Homebuyer Tax Credit: CRS Report RL34664, The First-Time Homebuyer Tax Credit , by [author name scrubbed].