Section 70204 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly referred to as the One, Big, Beautiful Bill Act, added new sections 530A, 128, and 6434 to the Code. Section 530A provides for the establishment of a Trump account for an eligible individual. Section 128 provides rules for employer contributions to a Trump account. Section 6434 provides rules for a one-time $1,000 pilot program contribution by the Secretary to the Trump account of an eligible child with respect to whom an election is made under section 6434.

A Trump account is an individual retirement account (as defined in section 408(a)) (IRA) not designated as a Roth IRA that is established for the exclusive benefit of an eligible individual (as defined in section 530A(b)(2)) or such eligible individual’s beneficiaries under section 530A. Special rules apply to the Trump account during the period that begins when an initial Trump account is first established for an account beneficiary (as defined in section 530A(b)(4)) and ends on December 31 of the calendar year in which the account beneficiary reaches the age of 17 (the growth period). The special rules concern contributions, investments, distributions, and reporting. After the growth period, most of the special rules no longer apply, and the rules under section 408 governing traditional IRAs generally apply.

The definition of a Trump account in section 530A(b)(1)(C)(iii) provides that the written governing instrument creating the Trump account must meet several requirements, one of which is that no part of the account funds will be invested in any asset other than an eligible investment during the growth period.

Section 530A(b)(3)(A) provides that the term eligible investment means any mutual fund or exchange traded fund that tracks the returns of a qualified index, does not use leverage, does not have annual fees and expenses of more than 0.1 percent of the balance of the investment in the fund, and meets such other criteria as the Secretary determines appropriate for purposes of section 530A.

Section 530A(b)(3)(B) provides that the term qualified index means the Standard and Poor’s 500 stock market index, or any other index that is comprised of equity investments in primarily United States (U.S.) companies, and for which regulated futures contracts (as defined in section 1256(g)(1)) are traded on a qualified board or exchange (as defined in section 1256(g)(7)). Section 530A(b)(3)(B) provides that such term shall not include any industry or sector-specific index, but may include an index based on market capitalization.

Notice 2025-68, 2025-52 IRB 856, informed taxpayers that the Treasury Department and the IRS intend to propose regulations on Trump accounts. The notice described guidance expected to be included in the proposed regulations in the form of answers to specific questions, including questions about eligible investments. Notice 2025-68 requested comments, with a comment period that ended February 20, 2026, and comments received in response to the notice are discussed below.

On March 9, 2026, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-117270-25) in the Federal Register (91 FR 11194) on the general requirements for Trump accounts, certain definitions relating to Trump accounts, rules regarding the election to open an initial Trump account, and rules regarding the responsible party for the initial Trump account. On the same day, the Treasury Department and the IRS also published a notice of proposed rulemaking (REG-117002-25) in the Federal Register (91 FR 11203) on making an election under section 6434 for the Trump account of an eligible child to receive a $1,000 pilot program contribution. This document proposes rules regarding eligible investments that implement section 530A(b)(1)(C)(iii) and (b)(3). The Treasury Department and the IRS anticipate proposing other rules under section 530A at a future date.

Proposed § 1.530A-3(b) would provide definitions of terms for purposes of section 530A(b)(1)(C)(iii) and (b)(3). The definitions of eligible investment in proposed § 1.530A-3(b)(1) and qualified index in proposed § 1.530A-3(b)(5) restate the definitions in section 530A(b)(3)(A) and (B).

A. Form of entity

Under section 530A(b)(3)(A), an eligible investment must be either a mutual fund or an exchange traded fund (ETF). Neither mutual fund nor ETF is defined in the Code. Notice 2025-68, in question and answer (Q&A) D-1, contained definitions of both terms intended to be consistent with their ordinary meanings.

One stakeholder recommended that the definition of ETF be revised so that it would include ETF share classes of mutual funds. The Treasury Department and the IRS agree with the recommendation because ETF share classes are within the category of investments ordinarily referred to as ETFs.

Under proposed § 1.530A-3(b)(2), an ETF would be defined as a domestic corporation (including a regulated investment company (RIC)) that is registered under the Investment Company Act of 1940, Public Law 76-768, 54 Stat. 789 (the 1940 Act), as amended, and that is either (i) an “exchange-traded fund” as defined for purposes of the 1940 Act in 17 C.F.R. § 270.6c-11(a)(1) or (ii) an entity that operates in substantially the same manner as an exchange-traded fund but that is not described in 17 C.F.R. § 270.6c-11(a)(1), such as a unit investment trust or ETF share class of a mutual fund operating as an ETF under exemptive relief granted by the Securities and Exchange Commission.

Like Notice 2025-68, proposed § 1.530A-3(b)(4) would provide that the term mutual fund means a domestic corporation (including a RIC) that is registered under the 1940 Act as an open-end company (as defined in 15 U.S.C. § 80a-5(a)(1)) and that is not an ETF. Proposed § 1.530A-3(b)(3) would define the term investment fund to mean a mutual fund or an ETF.

B. Tracks the returns of a qualified index

Section 530A(b)(3)(A)(i) provides that, to be an eligible investment, a mutual fund or ETF must track the returns of a qualified index. Notice 2025-68 (Q&A D-2) stated that a mutual fund or ETF tracks the returns of an index if its investment objective is to provide investment results that, before fees and expenses, replicate the performance of the index, and the fund holds investments that are reasonably expected to accomplish that objective (by, for example, holding shares of all of the stocks that are constituents of the index in proportion to their weightings).

A stakeholder recommended that guidance emphasize that the standard is a requirement to seek to replicate index returns, rather than to eliminate all deviations of fund performance from index performance. The Treasury Department and the IRS confirm that the reference to the fund’s objective is intended to require a fund to seek to replicate the returns of an index.

The stakeholder also recommended clarifying that an investment fund intending to replicate the returns of an index is not always required to hold all the underlying stocks included in its chosen index. An investment fund may hold less than all of the components of an index and still closely track the index’s returns. The Treasury Department and the IRS agree that tracking the returns of an index does not require holding each component of the index. The example in the notice was illustrative and not an additional requirement, and proposed § 1.530A-3(c)(1) would acknowledge the possibility of tracking the returns of an index by holding less than all of its components.

Notice 2025-68 (Q&A D-2) also described investment objectives and strategies that are not consistent with tracking the returns of an index: an objective to provide investment results inverse to the performance of the index or a strategy to outperform or perform differently from the index. As examples of the latter, the notice described funds that increase or decrease exposure to some index constituents based on the judgment of advisors, or that hold assets in some or all market conditions intended to decrease or increase the volatility, risk, or current income associated with the index.

Stakeholders have asked whether actively managed investment funds pursuing a strategy other than seeking to replicate the performance of a particular index can be eligible investments. Investing Trump account funds in an investment fund that does not track the returns of an index would be directly contrary to section 530A(b)(3)(A)(i). These proposed regulations would follow section 530A(b)(3)(A)(i), under which an investment fund that is actively managed is not an eligible investment.

One stakeholder expressed concern that the discretion exercised by managers or advisors of typical index funds would prevent those funds from being eligible investments under the standards described in the notice. Managers or advisors exercise discretion in pursuing their objective to replicate the returns of an index, including determining which index components to hold and when to execute trades. The stakeholder suggested that the language of the notice describing increased or decreased exposure to index constituents based on the judgment of advisors might be read as disqualifying an investment based on these or similar exercises of discretion. The Treasury Department and the IRS acknowledge this concern. Accordingly, proposed § 1.530A-3(c)(2) would exclude the reference to the discretion of advisors, so that advisors can make necessary decisions in pursuit of a fund’s objective to replicate the performance of an index.

The stakeholder also suggested that the reference to strategies used to “outperform” an index be eliminated as unnecessary in light of the more general reference to strategies used to “perform differently” from the index. The word “outperform” is intended to clarify that an objective to perform differently from an index includes an objective to outperform the index. Therefore, the proposed regulations do not reflect this suggestion.

One stakeholder asked for clarification regarding whether an investment fund may engage in securities lending to generate additional income while still being considered to track the returns of an index. Income from securities lending may be viewed as inconsistent with the general principle in proposed § 1.530A-3(c)(2) that an eligible investment may not use a strategy to perform differently from the relevant index, because securities lending generally increases the current income of the fund. Securities lending, however, appears to be consistent with the language and purposes of section 530A(b)(3). The statute does not mention securities lending, but securities lending by investment funds is common.

Moreover, an investment fund may engage in securities lending in a way that allows the fund to retain all of the economic benefits and burdens associated with the affected security. Section 1058(b) describes conditions under which a securities lending transaction is treated as a nonrecognition transaction to the lender. An investment fund that engages in securities lending continues to provide investors with passive participation in the performance of the index, so long as the fund retains its economic exposure to the securities lent. Therefore, proposed § 1.530A-3(c)(3) would provide, as an exception to the general rule in proposed § 1.530A-3(c)(2), that an investment fund does not fail to track the returns of an index because the investment fund engages in securities lending transactions so long as the fund retains full economic exposure to the securities lent.

Stakeholders requested clarification regarding whether a fund of funds may be an eligible investment. A fund of funds is an investment fund that invests in other investment funds (acquired funds). One stakeholder recommended that a fund of funds tracking multiple indices through its acquired funds be treated as tracking the returns of a qualified index. Section 530A(b)(3)(A)(i) requires an eligible investment to track the returns of “a qualified index” (emphasis added). A fund of funds that tracks multiple indices is not described in section 530A(b)(3)(A)(i). Providing rules to allow an eligible investment to track multiple indices would also add unnecessary complexity. Therefore, these proposed regulations would not treat any fund, including a fund of funds, that replicates the returns of multiple indices as an eligible investment. However, nothing in these proposed regulations would preclude a fund of funds from being an eligible investment if it tracks a single index and meets all of the other requirements in section 530A(b)(3).

C. Does not use leverage

Section 530A(b)(3)(A)(ii) provides that, to be an eligible investment, a mutual fund or ETF must not use leverage. Notice 2025-68 (Q&A D-3) stated that a mutual fund or ETF is considered to use leverage if, as a result of the fund’s use of borrowings, derivatives, or other strategies that are economically equivalent to borrowings, a percentage change in the level of an index tends to cause a materially greater percentage change in the value of the fund’s portfolio.

A stakeholder suggested that the leverage standard is unnecessary, because any fund using leverage as described in Q&A D-3 would also be failing to track the returns of an index under Q&A D-2. The stakeholder also explained that investment funds may use borrowing or their equivalents to gain efficient exposure to only a portion of the underlying index and that this practice, if assessed in isolation, may lead to material variations in the portfolio as compared to the performance of the underlying index. The stakeholder suggested that leverage should disqualify an investment fund only if the fund’s borrowings or economic equivalents in their totality is inconsistent with the fund’s investment objective of seeking to track the returns of a qualified index.

The Treasury Department and the IRS recognize that the requirements in section 530A(b)(3)(A) to track the returns of an index and not to use leverage are closely related, and that in Notice 2025-68, the standard for leverage (Q&A D-3) substantially overlaps with the standard for tracking the returns of an index (Q&A D-2). The alternative standard proposed by the stakeholder, however, would deprive the leverage provision of any significance because any fund excluded for use of leverage under that alternative standard would also be excluded for not tracking the returns of a qualified index. The Treasury Department and the IRS, however, agree with the stakeholder that the statutory exclusion of funds using leverage should not be read to restrict the transactions that regular index funds (those not seeking to multiply or magnify index changes) typically use to gain efficient exposure to an index. The statutory exclusion of investment funds that use leverage should be read to exclude the higher-risk leveraged funds that are less suitable for many Trump account beneficiaries. Therefore, these proposed regulations would define leverage by reference to increased risk.

Proposed § 1.530A-3(d)(1) would provide that an investment fund is considered to use leverage if the fund uses borrowings, derivatives, or other strategies that are economically equivalent to borrowings in a way that materially increases the risk of loss associated with an investment in the investment fund. Under this standard, as under Notice 2025-68, an investment fund uses leverage if, as a result of borrowings or derivatives or another economic equivalent, a change in the level of the index the returns of which the fund seeks to replicate tends to cause a materially greater proportional change in the net value of the fund’s portfolio. Consistent with the stakeholder’s recommendation, this standard requires an inquiry into risk associated with the fund as a whole and not one transaction in isolation.

Notice 2025-68 explained that borrowings and derivatives not entered into to multiply or magnify index returns generally would not be treated as leverage. The notice included as examples borrowings to provide liquidity for redemptions or for purchases of portfolio securities in connection with investment flows into the fund, and entering into derivatives as part of a fund’s strategy to replicate the performance of an index.

Like Notice 2025-68, these proposed regulations would describe uses of borrowings and derivatives that would not be expected to constitute the use of leverage for purposes of section 530A(b)(3)(A)(ii). Under the proposed regulations, however, whether any use of borrowings or derivatives constitutes the use of leverage would depend on whether it materially increases risk of loss. Proposed § 1.530A-3(d)(2) would provide that an investment fund is not considered to use leverage merely because it borrows or uses derivatives as part of its strategy to replicate the performance of an index, so long as the borrowings or derivatives do not materially increase the risk of loss associated with an investment in the investment fund. Thus, an investment fund is not considered to use leverage merely because the fund incurs short-term borrowings to provide liquidity for redemptions or to purchase portfolio securities in connection with investment flows into the fund or because the fund uses derivatives to gain synthetic exposure to certain index components. For an investment fund that engages in securities lending, proposed § 1.530A-3(d)(2) would provide that the investment fund’s obligation to return collateral to the borrower of the securities is not treated as leverage so long as the investment fund takes appropriate steps to limit the risk of loss with respect to the collateral. To limit the risk of loss with respect to cash collateral, the investment fund must hold the collateral in cash or highly liquid, conservative positions (like money market funds). To limit the risk of loss with respect to non-cash collateral, the investment fund must not sell the collateral or otherwise use the collateral (for example, by pledging it) to increase the fund’s exposure to other assets.

D. Qualified index

Section 530A(b)(3)(B) provides that a qualified index is the Standard and Poor’s 500 stock market index, or any other index that is comprised of equity investments in primarily U.S. companies and for which regulated futures contracts (as defined in section 1256(g)(1)) are traded on a qualified board or exchange (as defined in section 1256(g)(7)). Section 530A(b)(3)(B) also provides that a qualified index does not include any industry or sector-specific index but may include an index based on market capitalization.

Q&A D-5 in Notice 2025-68 stated that an index is considered to be comprised of equity investments if the index is comprised entirely of stocks and similar ownership interests in the form of partnership or membership interests.

Several stakeholders requested guidance that would allow an index with debt instruments as components to be a qualified index. Section 530A(b)(3)(B)(ii)(I) requires a qualified index to be “comprised of equity investments in primarily [U.S.] companies.” It is consistent with that statutory language for a qualified index to include some equity investments in non-U.S. companies, but not for a qualified index to include components other than equity investments. Accordingly, proposed § 1.530A-3(e)(5) would contain the same all-equity requirement as the notice.

One stakeholder recommended that a qualified index include a total-market index. While the term total-market may have different meanings, an index that represents an equity market broadly, including large-cap, mid-cap, and small-cap companies, may be a qualified index if the index meets the requirements in proposed § 1.530A-3(e). (For example, a regulated futures contract on the index must be traded on a qualified board or exchange and the index must be comprised of equity investments in primarily U.S. companies.)

Q&A D-5 stated that a company is a U.S. company if it is domestic under section 7701(a)(4). It also included a safe harbor under which an index would be treated as comprised of equity investments in primarily U.S. companies if U.S. companies represent at least 90 percent of the index based on their weightings in the index.

Stakeholders suggested that the 90-percent standard in the safe harbor was a higher threshold than what the statutory language suggests. The Treasury Department and the IRS note that a variety of provisions in the Code use “primarily” without providing a numerical threshold. A safe harbor provides certainty for some indices, so that the Standard and Poor’s 500 stock market index is not the only index assured of meeting the standard. Thus, proposed § 1.530A-3(e)(7) would retain the 90-percent safe harbor approach of the notice.

Q&A D-6 in Notice 2025-68 stated that an index is industry-specific or sector-specific if the inclusion of a company depends on the kind of business or industry in which the company is engaged.

Stakeholders did not comment on that aspect of the qualified index requirement, and proposed § 1.530A-3(e)(2) would provide substantially the same rule. Under proposed § 1.530A-3(e)(1), whether an index is industry-specific or sector-specific would be determined by reference to the index methodology for the index. Proposed § 1.530A-3(e)(1) would require a qualified index to have a publicly available index methodology that describes the criteria for inclusion in the index and the construction of the index.

Q&A D-6 also provided that environmental, social, and governance (ESG) indices are sector-specific. A stakeholder recommended that an index that has criteria for inclusion based on ESG factors not be described as a sector-specific index. The stakeholder explained that describing an ESG index as a sector-specific index may generate confusion about the meaning of the term as it is used in other contexts.

The Treasury Department and the IRS acknowledge that describing an ESG index as a sector-specific index could generate confusion about the meaning of the term. Accordingly, proposed § 1.530A-3(e)(3) would not describe an ESG index as a sector-specific index. Nevertheless, the Treasury Department and the IRS have determined that it is appropriate to exclude investment funds that track ESG indices because they limit exposure to companies in a way that makes them similar to sector-specific funds. Accordingly, under the authority provided in section 530A(b)(3)(A)(iv), proposed § 1.530A-3(e)(3) would provide that any investment fund that tracks the returns of an ESG index is not an eligible investment. Proposed § 1.530A-3(e)(3) would further provide that an ESG index includes any index that has, or is marketed as having, a focus on environmental, social, or governance factors.

Q&A D-6 also defined an index based on market capitalization, the substance of which would remain unchanged in the proposed regulations. Proposed § 1.530A-3(e)(4) would provide that an index is based on market capitalization if the inclusion of a company in the index depends on the company having a market capitalization within a specified range or over or under a specified threshold, or that meets specified ranking criteria.

E. Limit on annual fees and expenses

Section 530A(b)(3)(A)(iii) provides that, to be an eligible investment, a mutual fund or ETF must not have annual fees and expenses of more than 0.1 percent of the balance of the investment in the fund.

Q&A D-4 in Notice 2025-68 stated that an investment fund would meet the requirements of section 530A(b)(3)(A)(iii) if the sum of its annual fees and its annual expenses is not more than 0.1 percent of the value of the fund’s net assets. Q&A D-4 in Notice 2025-68 described a fund’s annual fees as including any annual or recurring fees charged by the fund directly to the investor, as disclosed in a fund’s prospectus. The notice requested comments on the appropriate treatment of fees charged for transactions.

A stakeholder recommended that all amounts that are not part of an investment fund’s expense ratio, including transactional fees such as sales charges, loads, and redemption fees, be excluded from a fund’s fees and expenses for purposes of section 530A(b)(3)(A)(iii). Excluding all fees is inconsistent with the language in section 530A(b)(3)(A)(iii), which limits “fees and expenses.” Both fees and expenses reduce the real returns to investors. Excluding transactional fees appears to be similarly inconsistent with the language and purposes of section 530A(b)(3)(A)(iii), because an investment fund’s fees may be entirely transactional fees and such fees reduce real returns to investors. Moreover, investment funds can structure their fees in a variety of ways. A rule that excludes some fees from the limit in section 530A(b)(3)(A)(iii) based on the form of the fees would create an incentive for investment funds to charge or increase that form of fee. Therefore, the limit on fees and expenses should apply to recurring fees (as under the notice) and other fees (on which the notice requested comments).

Proposed § 1.530A-3(f)(1) would provide that an investment fund is not an eligible investment if the sum of its annual fees and annual expenses is more than 0.1 percent of the net value of its assets. Amounts charged by investment funds directly to investment fund holders are referred to as fees and addressed in proposed § 1.530A-3(f)(2). Amounts borne by investment fund holders indirectly in the form of costs incurred by investment funds are referred to as expenses and addressed in proposed § 1.530A-3(f)(3).

Proposed § 1.530A-3(f)(2)(ii) would provide that an investment fund’s fees include all amounts that the fund charges its investment fund holders directly, without regard to how such amounts are computed, when they are imposed, or how such amounts are referred to in securities filings or marketing materials. Under proposed § 1.530A-3(f)(2)(i), the amount of an investment fund’s annual fees would generally be the aggregate amount of fees imposed by the investment fund during the most recent fiscal year (for purposes of the fund’s securities filings) that has appeared in the fund’s prospectus, expressed as a percentage of the investment fund’s average net asset value for that fiscal year. If an investment fund’s prospectus discloses changes to the fund’s fee structure that would increase the annual fee amount, the computation must take into account the change to the fee structure.

Q&A D-4 in Notice 2025-68 indicated that annual fees and annual expenses will not include any amount that is paid to a broker or intermediary and that is not specified or imposed by or on behalf of the fund.

Stakeholders recommended that guidance clarify the treatment of charges not imposed by an investment fund, including custodial fees or fees to cover the administrative and reporting costs associated with a Trump account. One stakeholder pointed out that mutual fund account fees would be treated as fees of the mutual fund, resulting in differing treatment for mutual funds and ETFs. Another stakeholder requested clarification that amounts paid for advice or planning services are not subject to the 0.1 percent limit.

The 0.1 percent limit in section 530A(b)(3)(A)(iii) is part of the definition of an eligible investment. The limit does not apply to trustee fees. Therefore, custodial fees or similar charges that are associated with a Trump account itself rather than with any particular investment fund are analyzed as trustee fees, which are discussed later in this preamble. If an account beneficiary pays an amount to an advisor for advice on whether to open a Trump account or what investment to select, and the advice and the amount are entirely independent of any investment fund, then the amount is not within the scope of the annual fees of an investment fund. Given the definition of annual fees, a rule specifically excluding an amount having no connection to any fund appears to be unnecessary and more likely to confuse than clarify the definition. A sales load, however, is part of a mutual fund’s annual fees, even though the amount charged may ultimately benefit a financial intermediary, because it is a cost of investing in a particular investment fund.

Proposed § 1.530A-3(f)(2)(iii) would provide that amounts charged to an account beneficiary by a trustee for providing an account are not treated as part of any investment fund’s annual fees but as trustee fees. A fee charged by a Trump account trustee or financial intermediary for a service, such as carrying out a purchase or sale of an investment fund is not considered a part of the investment fund’s fees if the fee is not charged on behalf of or at the direction of the investment fund, is not paid (directly or indirectly) to the investment fund, and is not attributable to any cost of offering the investment fund. See part IV of this Explanation of Provisions regarding fees and expenses charged by a Trump account trustee.

Q&A D-4 in Notice 2025-68 described a fund’s annual expenses as the amount set forth in its prospectus as total annual operating expenses. Investment funds are already required to compute and report these amounts. A fund’s total annual operating expenses is also used to compute the fund’s expense ratio, which is a metric that is commonly published and referred to in comparing investment funds. No comments were received regarding the approach to annual expenses in the notice, and proposed § 1.530A-3(f)(3) would provide substantially the same rule.

Proposed § 1.530A-3(f)(3) would provide certain additional clarifications to aid in the computation of a fund’s total annual operating expenses. These include that if an investment fund’s prospectus lists total operating expenses reduced by fee waivers or expense reimbursements, the reduced amount applies for purposes of section 530A(b)(3)(A)(iii). In addition, proposed § 1.530A-3(f)(3) would provide that if an investment fund has multiple share classes, annual expenses are computed separately for each class, based on the expenses and assets allocable to each class.

Section 530A(b)(1)(C)(iii) provides that the written governing instrument creating a Trump account must meet the requirement that no part of the account funds will be invested in any asset other than an eligible investment during the growth period.

Q&A D-7 of Notice 2025-68 stated that a trustee must have procedures in place to monitor and enforce the requirements of section 530A(b)(1)(C)(iii). The Q&A stated that it is not sufficient merely for a written governing instrument of a Trump account to state the prohibition of section 530A(b)(1)(C)(iii); the trustee must comply with the prohibition. The Q&A stated that the procedures may, but are not required to, be in the written governing instrument.

A stakeholder questioned whether there is authority for requiring operational compliance with the eligible investment requirements for Trump accounts. Section 530A(b)(1)(C) imposes limits by reference to the written governing instrument of a Trump account, which cannot be enforced by the IRS. Therefore, the stakeholder suggests any failure by a trustee to follow the written governing instrument is a contractual violation enforceable by the account beneficiary.

The Treasury Department and the IRS interpret the language of section 530A(b)(1)(C) as requiring not just specific language to be contained in the written governing instrument but also as requiring operational compliance with the language set forth in the written governing instrument. The trustee is in the best position to ensure that an account meets requirements of section 530A(b)(1)(C), which concern contributions, distributions, and investments. Thus, the trustee must structure its operations to ensure the account meets the requirements. Without such an operational compliance requirement, the written instrument is not, in fact, the written governing instrument.

This approach of requiring operational compliance with Code requirements in the written governing instrument is consistent with how the Treasury Department and the IRS have interpreted statutory rules for section 401(a) plans that, on their face, could be read to suggest only a requirement that needs to be set forth in a plan document. For example, section 401(a)(9) provides that “[a] trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee” will be distributed in accordance with section 401(a)(9)(A) (emphasis added). The Treasury Department and the IRS have interpreted this language as requiring operational compliance in order to maintain qualified plan status under section 401(a).

Proposed § 1.530A-3(g) would provide procedures for a trustee to follow to ensure that Trump account funds are invested in accordance with section 530A(b)(1)(C)(iii), including for selection of eligible investments and default eligible investments, situations in which funds temporarily need not be invested in an eligible investment, and monitoring of investment funds. Many of these procedures involve an account beneficiary, who generally will have another person acting on their behalf while they are a minor.

Proposed § 1.530A-3(g)(2) would provide that the written governing instrument must include the procedures described in proposed § 1.530A-3(g)(4), (5), and (7). Proposed § 1.530A-3(g)(3) would clarify that if an account does not comply with section 530A(b)(1)(C)(iii), taking into account the flexibility added by proposed § 1.530A-3(g), the account will cease to be a Trump account and cease to be an IRA.

Q&A D-7 of Notice 2025-68 also stated that these procedures with respect to the growth period must include at least that the trustee must offer only eligible investments as investment options for a Trump account, and the trustee must select a default eligible investment and must promptly invest any uninvested funds in the default eligible investment, unless directed by or on behalf of the account beneficiary to invest the funds in a different eligible investment.

Stakeholders sought clarification regarding default eligible investments, including whether a trustee may have only one default eligible investment, whether any eligible investment may be the default eligible investment, and whether an account beneficiary may specify another eligible investment as the designated eligible investment for that particular account beneficiary.

Proposed § 1.530A-3(g)(4)(i) would provide that a trustee must limit investments available for Trump account investments to investment funds that the trustee has determined are eligible investments.

Proposed § 1.530A-3(g)(4)(ii) would provide that a trustee must establish for each Trump account under the trustee’s administration a default eligible investment in which all contributions, proceeds from sales or other dispositions, and any other amounts for investment (other than amounts addressed by proposed § 1.530A-3(g)(4)(iii)) will be invested unless the account beneficiary specifies that the Trump account be invested in a different eligible investment for the contribution or other amount. Proposed § 1.530A-3(g)(4)(ii) also would provide that the default eligible investment can be a single eligible investment or a combination of eligible investments in specified proportions, and that the default eligible investment(s) must be clearly disclosed to account beneficiaries. Proposed § 1.530A-3(g)(4)(ii) would provide that the requirement to establish a default eligible investment does not preclude arrangements between a trustee and the account beneficiary that give effect to different preferences on an ongoing basis.

Proposed § 1.530A-3(g)(4)(iii) would provide that the trustee of a Trump account must disclose to the account beneficiary how amounts received as dividends or other distributions from eligible investments will be invested unless the account beneficiary gives different instructions regarding the dividends and distributions. For example, amounts received as dividends and distributions might be reinvested in the same eligible investments that paid the dividends or other distributions or invested in the Trump account’s default eligible investment. Proposed § 1.530A-3(g)(4)(iii) would also provide that the trustee may give effect to directions from the account beneficiary that a specific distribution, or distributions generally, be invested in a different way that complies with section 530A(b)(1)(C)(iii).

Q&A D-8 of Notice 2025-68 stated that, during the growth period, the trustee’s procedures may not permit funds in a Trump account to be invested in a money market fund but may permit an amount received as a contribution, a dividend or other distribution from an eligible investment, or an amount received as a result of a disposition (such as sale) of an eligible investment, to be held in cash for the time reasonably necessary to complete the investment of the amount in an eligible investment.

Stakeholders recommended that amounts should be permitted to be held in cash for the time reasonably necessary to complete a distribution, rollover, or payment of fees. Proposed § 1.530A-3(g)(5)(i) would provide that a trustee may permit an amount received in a Trump account as cash, such as an amount received as a contribution, proceeds of a sale or other disposition, or a distribution, to be held in cash for the time reasonably necessary to complete an investment, reinvestment, distribution, rollover, payment of fees, or other transaction permitted under section 530A.

Q&A D-9 of Notice 2025-68 stated that, during the growth period, the trustee’s procedures must require reasonable ongoing monitoring by the trustee regarding whether a fund held by a Trump account continues to be an eligible investment. This Q&A also stated that in the event that a fund held by a Trump account ceases to be an eligible investment during the growth period, the Trump account will no longer be permitted to be invested in such fund.

Stakeholders made a variety of recommendations and sought clarification with respect to the trustee’s obligation to monitor the status of its existing investments as eligible investments. These recommendations include providing a safe harbor regarding when a trustee would be treated as satisfying its obligations relating to monitoring investment funds. For example, one stakeholder recommended that trustee monitoring be based on periodic review and reliance on public disclosures. Stakeholders also recommended a 120-day grace period for a fund to regain eligible investment status (by, for example, adjusting its fees and expenses) or for the trustee to dispose of shares in the fund and reinvest the proceeds in an eligible investment.

The Treasury Department and the IRS recognize that day-to-day monitoring by a trustee regarding whether an investment fund continues to be an eligible investment raises significant practical concerns. The Treasury Department and the IRS agree with stakeholders that a safe harbor requiring trustees to make periodic determinations regarding eligible investment status would be more administrable for trustees.

Proposed § 1.530A-3(g)(6) would require that the trustee’s procedures provide for monitoring of investment funds in which the trustee’s Trump accounts are invested, with an initial determination whether the investment fund is an eligible investment when the trustee first offers the investment fund to any Trump account for which it is the trustee and then subsequent periodic determinations that the investment fund continues to be an eligible investment. Proposed § 1.530A-3(g)(6) would provide that the trustee may rely on an investment fund’s prospectus and other public documents required by Federal securities laws in making determinations of eligible investment status. Proposed § 1.530A-3(g)(6) would also provide that a trustee is treated as monitoring investment funds in which the trustee’s Trump accounts are invested if the trustee’s periodic determinations occur at least once every 12 months.

Proposed § 1.530A-3(g)(5)(ii) would provide that in the event an investment fund ceases to be an eligible investment, the trustee’s procedures must require the prompt sale or disposition of shares in the investment fund and the reinvestment of the proceeds in an eligible investment. Specifically, proposed § 1.530A-3(g)(5)(ii)(A) would provide that a trustee must sell or dispose of shares in the investment fund and reinvest the proceeds within 30 days of when the investment fund ceases to be an eligible investment. Proposed § 1.530A-3(g)(5)(ii)(B) would provide that the time when an investment fund is treated as ceasing to be an eligible investment is determined based on whether the trustee is in compliance with the monitoring and periodic determination requirements in proposed § 1.530A-3(g)(6). If the trustee is not in compliance with the monitoring and periodic determination requirements in proposed § 1.530A-3(g)(6), the investment fund is treated as ceasing to be an eligible investment on the first day that the investment fund does not meet the requirements to be an eligible investment. If the trustee is in compliance with the monitoring and periodic determination requirements of proposed § 1.530A-3(g)(6), the time of the trustee’s next periodic determination in accordance with proposed § 1.530A-3(g)(6) or, if earlier, the time that the trustee acquires actual knowledge that the investment is no longer an eligible investment, is treated as the time the investment fund ceases to be an eligible investment. This provision is intended to address concerns regarding the timing of identifying and then disposing of shares in an investment fund expressed in stakeholders’ requests for specific time thresholds for dispositions.

Stakeholders discussed what notice a trustee should be required to provide to an account beneficiary when an investment fund in which the account beneficiary’s funds are invested ceases to be an eligible investment. One stakeholder contemplated notice to an account beneficiary before the trustee reinvests the proceeds from the sale of the fund that ceases to be an eligible investment. The Treasury Department and the IRS believe that requiring notice before reinvestment unnecessarily slows down reinvestment. Proposed § 1.530A-3(g)(5)(ii) would not require notice to account beneficiaries before selling or disposing of shares in the investment fund but would require notice to account beneficiaries after reinvestment of the proceeds about how the proceeds are reinvested.

Proposed § 1.530A-3(g)(7) would provide that if a trustee has adopted the required procedures but a portion of the assets in a Trump account is not invested in an eligible investment due to an administrative error by the trustee (for example, due to an oversight or mistake in applying the procedures), the trustee must sell or dispose of the assets that are not invested in an eligible investment and reinvest the proceeds in an eligible investment within 30 calendar days from the first day that portion was not invested in an eligible investment. Furthermore, the trustee must disclose to the account beneficiary the duration of the error, the assets that were held during the error period, and the amount reinvested in an eligible investment at the end of the error period.

Regarding the proposed correction of administrative errors, the Treasury Department and the IRS are considering providing a rule that would allow a trustee, in the case of its administrative error, to replace, to the extent needed, earnings in the account that the account would have had if the account had been properly invested in an eligible investment. Such replaced earnings would not be considered contributions subject to the contribution limitation under section 530A(c)(2). Comments are requested regarding such a rule.

The Treasury Department and the IRS recognize the importance of helping account beneficiaries receive the benefits of a Trump account, particularly because account beneficiaries are minors. Therefore, in addition to the proposed correction procedures included in these proposed regulations, the Treasury Department and the IRS request comments regarding other failures under section 530A(b)(1)(C) that may be appropriate for correction and proposed corrections for such failures (taking into account that trustees must have procedures in place to prevent most such failures). The Treasury Department and the IRS intend to provide additional correction procedures for trustees, as needed, to correct certain Trump account failures. Comments are additionally requested regarding whether potential Trump account corrections should be included as part of the IRA correction procedure authorized under section 305(c) of Public Law 117-328, 136 Stat. 4459 (December 29, 2022), commonly referred to as the SECURE 2.0 Act.

Q&A D-10 of Notice 2025-68 stated that a trustee may permit funds in a Trump account to be invested in multiple eligible investments. The Treasury Department and the IRS confirm that a Trump account may be invested in any number of eligible investments, and proposed § 1.530A-3(g)(1) would provide that Trump account funds may be invested in one or more eligible investments.

The Treasury Department and the IRS intend to exercise regulatory authority conferred by section 530A(a) to issue regulations that would allow contributions of readily tradable public company stock to be made to Trump accounts as part of a philanthropic contribution. The regulations would require that the stock transferred to the Treasury Department for this purpose must satisfy certain criteria and other requirements to be treated as a charitable contribution. All other contributions to Trump accounts would continue to have to be made in cash pursuant to section 408(a)(1), and such funds would continue to be subject to the requirement in section 530A(b)(1)(C)(iii) that they cannot be invested in any asset other than an eligible investment during the growth period.

Section 530A is intended to promote long-term investing for the benefit of children. Section 530A contains provisions designed to maintain a low cost for these accounts. In particular, section 530A(b)(3)(A)(iii) limits eligible investments to those with low annual fees and expenses and section 530A(g) permits the Secretary to take into account costs imposed by the trustee on the account or the account beneficiary when selecting the trustee. Additionally, commenters and other stakeholders have expressed concerns with the potential for fees and expenses to diminish the account balances over time (especially given the small initial balances and long expected holding periods). One commenter raised the concept of expressly prohibiting additional fees because such fees are not contemplated in the statutory language.

The Treasury Department and the IRS are considering ways to keep costs down for these accounts, and request comments on alternative ways in which this might be achieved, including the possibility of prohibiting trustees from charging any fees with respect to the account beneficiary or the eligible investments held by the account beneficiary.

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The proposed regulations have been designated by the Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the Treasury Department and the OMB regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant under section 3(f) of Executive Order 12866 and subject to review under Executive Order 12866 and section 1(b) of the MOA. Accordingly, the proposed regulations have been reviewed by OMB. This proposed rule is not expected to be considered a regulatory action under Executive Order 14192 because it does not impose any more than de minimis regulatory costs.

Need for Regulation

The proposed regulations would provide guidance relating to eligible investments for Trump accounts under section 530A. The proposed regulations would define terms related to eligible investments, provide rules for determining whether an investment fund is an eligible investment, and provide procedures for a trustee of a Trump account to ensure that a Trump account meets requirements concerning eligible investments.

The Statute and the Proposed Regulations

Public Law 119-21, commonly referred to as the One, Big, Beautiful Bill Act, added new sections 530A, 128, and 6434 to the Code. Section 530A describes Trump accounts, section 128 describes certain employer contributions to Trump accounts, and section 6434 describes the Trump accounts contribution pilot program. The proposed regulations provide guidance on eligible investments in a Trump account under section 530A(b)(3).

Section 530A defines a Trump account as an IRA with some special rules. Most special rules that distinguish Trump accounts from other IRAs apply only during the growth period. The first day of the growth period is the day the account is established, and the final day of the growth period is December 31 of the calendar year in which the account beneficiary attains age 17. The rules for traditional IRAs generally apply after the growth period. A Trump account may be established for the benefit of a child prior to the calendar year in which the child attains age 18 if the child has been issued a social security number.

In general, distributions from Trump accounts are not permitted during the growth period. The entire balance of a Trump account may be rolled over in a direct trustee-to-trustee transfer to a new Trump account of the account beneficiary. The entire balance of a Trump account may be rolled over in a direct trustee-to-trustee transfer to an ABLE account of the account beneficiary in the calendar year the account beneficiary attains age 17.

Funds in a Trump account may only be invested in eligible investments during the growth period. An eligible investment generally is a mutual fund or ETF that tracks an equity index of primarily U.S. companies, such as the S&P 500 index, does not use leverage, and has annual fees and expenses of no more than 0.1 percent of the balance of the investment in the fund.

Trump accounts may receive contributions from nonprofits, governments, employers, and individuals. In general, contributions to a Trump account are subject to an annual limit of $5,000, adjusted for inflation.

Governments and nonprofits may make qualified general contributions through the Treasury Department, and such contributions must be allocated in equal amounts to the Trump accounts of every account beneficiary in a qualified class. Qualified general contributions from governments and nonprofits through the Treasury Department do not count towards the $5,000 annual contribution limit.

Section 128 sets rules for certain employer contributions to Trump accounts. Employers may contribute to the Trump account of an employee or an employee’s dependent. Section 128 employer contributions to a Trump account are excluded from the employee’s income, up to an annual limit of $2,500, adjusted for inflation. Section 128 employer contributions count towards the $5,000 annual contribution limit.

Section 6434 describes the Trump accounts contribution pilot program. In the pilot program, the Secretary will pay $1,000 to the Trump accounts of eligible children. A U.S. citizen born in 2025, 2026, 2027, or 2028 who has been issued a social security number and for whom no request for a pilot program contribution has previously been processed is eligible for a pilot program contribution. Pilot program contributions do not count towards the $5,000 annual contribution limit.

All other contributions to a Trump account, including contributions from friends or family members, are non-deductible contributions (they create investment in the contract) and count towards the $5,000 annual contribution limit.

The proposed regulations (§ 1.530A-3) are just one piece of the implementation of section 530A; prior guidance addressed the election to open an initial Trump account (§ 1.530A-1), and future guidance will address other issues (§§ 1.530A-2, 1.530A-4, 1.530A-5, 1.530A-6, and 1.530A-7). The proposed regulations would define the following terms for the purposes of implementing section 530A: ETF, mutual fund, and investment fund. For implementing section 530A, the definition of ETF is taken from 17 C.F.R. §270.6c 11(a)(1), modified to include entities that operate in substantially the same manner. For implementing section 530A, the definition of mutual fund is taken from 15 U.S.C. § 80a-5(a)(1), modified to exclude ETFs. An investment fund is an ETF or a mutual fund.

The proposed regulations would provide rules for determining whether an investment fund is an eligible investment. The rules would clarify that an investment fund (1) tracks the returns of an index if it seeks to provide investment results that replicate the performance of the index and the fund holds investments that are reasonably expected to accomplish that objective, (2) uses leverage if it uses borrowings, derivatives, or other strategies that are economically equivalent to borrowings in a way that materially increases the risk of loss associated with an investment in the fund, and (3) is not an eligible investment if it charges annual fees and annual expenses of more than 0.1% of the net value of its assets. The rules would clarify that an investment fund is not an eligible investment if it corresponds to the returns of an ESG index. The rules would clarify that, to be a qualified index, an index (1) must have a publicly available index methodology, (2) must not include a stock or similar ownership interest based on the industry of the issuing company, and (3) must be comprised of stocks and interests in companies that are primarily domestic under section 7701(a)(4). The rules would provide a safe harbor that an index with at least 90 percent U.S. companies by index weight is considered to be primarily U.S. companies.

The proposed regulations would provide procedures for a trustee of a Trump account to ensure that funds are invested in an eligible investment. A trustee would be required to ensure that investment funds available for a Trump account are eligible investments and that contributions to a Trump account are invested in an eligible investment by default. A trustee would generally be required to ensure that an investment fund held by a Trump account that ceases to be an eligible investment is disposed and the proceeds reinvested in an eligible investment within 30 days of ceasing to be an eligible investment. However, if a trustee makes periodic determinations of whether an investment fund is an eligible investment based on public documents at least once every 12 months, then the trustee would generally be permitted to rely on the periodic determinations, and the trustee would be required to ensure that an investment fund that ceases to be an eligible investment is disposed and the proceeds reinvested within 30 days of the periodic determination.

Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations.

Affected Entities and Taxpayers

The proposed regulations are expected to affect 85 million children in 44 million families.

Economic Effects of the Proposed Regulations

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The collections of information in these proposed regulations contain third-party disclosure and recordkeeping requirements that are necessary to ensure that no part of the account funds will be invested in any asset other than an eligible investment during the growth period as required under section 530A(b)(1)(C)(iii). These collections of information generally would be used by the IRS for tax compliance purposes and by account beneficiaries and trustees to ensure the account qualifies as a Trump account.

This proposed regulation provides that beneficiaries can direct trustees how to allocate funds among eligible investments. Clients being able to allocate funds within their accounts is a usual and customary business practice. Usual and customary business records are incurred as a normal course of business activities and are excluded from the definition of burden under 5 CFR 1320.3(b)(2).

The proposed regulation includes third-party disclosures and associated recordkeeping requirements from trustees to account beneficiaries (or “legally responsible parties”). IRS is soliciting feedback on these collection requirements and their associated burdens. IRS anticipates that the likely respondents are businesses and for-profit organizations. Table 1 provides a high-level description of the collection requirements and the regulatory section that include additional details. Table 2 provides the estimated burden placed on trustees for each collection requirement.

The collections contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act under OMB Control Number 1545-NEW. Commenters are strongly encouraged to submit public comments electronically. Written comments and recommendations for the proposed information collection should be sent to www.reginfo.gov/public/do/PRAMain, with copies to the Internal Revenue Service. Find this particular information collection by selecting “Currently under Review - Open for Public Comments” then by using the search function. Submit electronic submissions for the proposed information collection to the IRS via email at pra.comments@irs.gov (indicate CC-00349938-26 on the Subject line). Comments on the collection of information should be received by October 20, 2026.

Comments are specifically requested concerning: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility; (b) the accuracy of the estimated burden associated with the proposed collection of information; (c) how the quality, utility, and clarity of the information to be collected may be enhanced; (d) how the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The Secretary hereby certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). The proposed rules would not impose a significant economic impact on any regulated entities because the regulation’s economic impact on entities is generally limited to requiring procedures to be set up by the trustee to ensure compliance with the statute and the regulation, language in the written governing instrument, requiring disclosure of the default eligible investment and how dividends will be invested (or any changes thereto), making periodic (likely annual) determinations that investments are still eligible investments, and rare disclosures if a reinvestment has occurred because of an ineligible investment. Because these requirements are either one-time, rare, or limited to internal determinations, any economic impact is expected not to be significant. Additionally, the proposed regulations affect only trustees of Trump accounts, which generally should not include small entities and therefore should not affect a substantial number of small entities. Therefore, a Regulatory Flexibility Act analysis is not required.

Notwithstanding this certification, the Treasury Department and the IRS invite comments on the impacts these proposed regulations may have on small entities.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

OMB’s Office of Information and Regulatory Affairs has determined that this proposed rule is not significant and is not subject to review under section 6(b) of Executive Order 12866, as amended. This proposed rule is expected to be an Executive Order 14192 deregulatory action.

This proposed rulemaking does not impose or revise any information collections subject to 44 U.S.C. Chapter 35.

The Regulatory Flexibility Act requires consideration of the regulatory impact on small businesses. It is hereby certified that these proposed regulations, if adopted, will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

The economic impact of these regulations is not expected to be significant. These regulations are not expected to result in economically meaningful changes in behavior. They would update existing regulations in order to implement statutory changes enacted after the publication of the 2009 regulations. They provide guidance for administrators and sponsors of single-employer defined benefit plans regarding the determination of target normal cost and the funding target.

For the reasons stated, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. Notwithstanding the above, the Treasury Department and the IRS invite comments on the impact the proposed rules would have on small entities.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (entitled Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.

For taxable years beginning after December 31, 2025, section 250(a)(1) allows a domestic corporation to deduct 33.34 percent of the corporation’s foreign-derived deduction eligible income (FDDEI). FDDEI is the deduction eligible income (DEI) of any domestic corporation derived in connection with (i) property sold to any person that is not a United States person and is for a foreign use, or (ii) services provided to any person, or with respect to property, not located within the United States. Section 250(b)(1). Section 250(b)(3)(A) defines DEI as the excess (if any) of a domestic corporation’s gross income determined without regard to certain categories of gross income over the expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such gross income.

Section 70322(a)(1) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), amended section 250(b)(3)(A)(i) to add a new category of income that is excluded from the determination of DEI. See section 250(b)(3)(A)(i)(VII). Specifically, for purposes of determining DEI and except as otherwise provided by the Secretary, section 250(b)(3)(A)(i)(VII)(aa) and (bb) excludes from gross income any income and gain from the sale or other disposition (including pursuant to the deemed sale or other deemed disposition or a transaction subject to section 367(d)) of intangible property (as defined in section 367(d)(4)), and any other property of a type that is subject to depreciation, amortization, or depletion by the seller, respectively.

Additionally, section 70322(a)(2) of the OBBBA amended section 250(b)(5)(E) (defining the terms “sold,” “sells,” and “sale”, collectively, “sale”) to provide that section 250(b)(5)(E) does not apply for purposes of the new category of gross income excluded from the determination of DEI in section 250(b)(3)(A)(i)(VII).¹ For purposes of section 250(b), except for paragraph (3)(A)(i)(VII) as amended by the OBBBA, the terms “sold,” “sells,” and “sale” included any lease, license, exchange, or other disposition. Section 250(b)(2)(E). Therefore, the general definition of sale under section 250 (which includes leases, licenses, exchanges, or other dispositions) does not apply to sales described in section 250(b)(3)(A)(i)(VII).

Section 70322(a)(3) of the OBBBA provides that the amendments to exclude income and gain from certain property sales, and the modification to the general definition of sale, apply to sales or other dispositions (including pursuant to deemed sales or other deemed dispositions or transactions subject to section 367(d)) occurring after June 16, 2025.

Section 70321(a) amended section 250(a)(1) by reducing the percentage of FDDEI permitted to be deducted under section 250 from 37.5 percent to 33.34 percent. Section 70322(b)(1) of the OBBBA amended section 250(b)(3)(A)(ii), which provides rules regarding the deductions properly allocable to DEI. Section 70323(b) of the OBBBA removed the deemed intangible income (DII) and deemed tangible income return (DTIR) components from the computation of foreign-derived intangible income (FDII), replaced “foreign-derived intangible income” with “foreign-derived deduction eligible income,” and made conforming amendments to reflect the revised terms and redesignated provisions, effective for taxable years beginning after December 31, 2025.

On December 4, 2025, the Treasury Department and the IRS released Notice 2025-78, 2025-52 I.R.B. 874, describing rules expected to be included in forthcoming proposed regulations addressing the scope of certain property sales or dispositions that are excluded from the determination of DEI under section 250(b)(3)(A)(i)(VII), which, when finalized, would apply to sales or other dispositions occurring after June 16, 2025. However, Notice 2025-78 permitted taxpayers to rely on the rules described therein for sales or other dispositions occurring after June 16, 2025, and before these proposed regulations are published in the Federal Register, provided taxpayers apply the rules in their entirety and in a consistent manner for all applicable taxable years.

Consistent with Notice 2025-78, the proposed regulations would address the meaning and scope of section 250(b)(3)(A)(i)(VII), which, as noted previously, excludes from DEI income and gain from the sale or other disposition of (1) intangible property and (2) other property of a type subject to depreciation, amortization, or depletion by the seller. The proposed regulations would also modify certain regulations under section 250 to reflect other amendments under the OBBBA and to clarify that FDDEI remains a subset of DEI.

The Treasury Department and the IRS intend to address other changes made by the OBBBA, including with respect to the deductions properly allocable to DEI and the removal of the DTIR and DII from the FDII calculation, in separate guidance.

A. In General

Under proposed §1.250(b)-1(c)(15)(vii), gross DEI would be determined without regard to a new category of gross income, “excluded property sales income.” Proposed §1.250(b)-1(h) would provide rules to determine whether income and gain from the sale or disposition of certain property to any person is treated as excluded property sales income. Proposed §1.250(b)-1(h)(1) would define “excluded property sales income” to mean any income and gain derived from the sale or other disposition of two categories of property: intangible property and “other excluded property.”

B. Intangible Property

Section 250(b)(3)(A)(i)(VII)(aa) excludes sales or dispositions of intangible property, as defined in section 367(d)(4), from DEI (and, thus, from FDDEI). Existing regulations under section 250 define intangible property by reference to section 367(d)(4) and specify that, for purposes of section 250, intangible property does not include a copyrighted article as defined in §1.861-18(c)(3). See §1.250(b)-3(b)(11). Thus, for purposes of section 250, a copyrighted article includes a copy of digital content from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. See §1.861-18(c)(3).

Section 3.01(3) of Notice 2025-78 used the same definition of intangible property as the existing section 250 regulations, including that this term does not include a copyrighted article as described in §1.861-18(c)(3). Proposed §1.250(b)-1(h)(1)(i) would provide the same definition of intangible property by reference to §1.250(b)-3(b)(11). See proposed §1.250(b)-1(h)(1)(i).

Comments in response to Notice 2025-78 requested further clarity on the treatment of software transactions in the context of intangible property and other excluded property. These comments are addressed below in part II.E of this Explanation of Provisions section.

C. Other Excluded Property

Consistent with section 3.01(4) of Notice 2025-78, the proposed regulations would generally define property of a type that is subject to depreciation, amortization, or depletion (other excluded property) as property that, in the hands of the seller, is or has been of a character subject to the allowance for depreciation, or is or has been subject to an allowance for amortization or depletion. See proposed §1.250(b)-1(h)(2)(ii). Therefore, other excluded property would not include, for example, property that has always been held as inventory by the seller because such property would not be “of a character” subject to the allowance for depreciation.

For property subject to depreciation under section 167, the proposed regulations would adopt the phrase “property of a character subject to the allowance for depreciation under section 167” to interpret the phrase “property of a type that is subject to depreciation” that appears in section 250(b)(3)(A)(i)(VII)(bb). This phrasing is adopted because it is a term of art commonly used to describe property depreciated under section 167, including by Congress in other Code provisions that reference section 167, such as sections 174A(c)(1) (Domestic research or experimental expenditures), 197(f)(7) (Amortization of goodwill and certain other intangibles), 1221(a)(2) (Capital asset defined), and 1231(b)(1) (Property used in the trade or business and involuntary conversions).

Consistent with section 3.01(6) of Notice 2025-78, the proposed regulations would generally provide that other excluded property retains its character in the hands of certain related parties if acquired pursuant to a basis-carryover transaction with a principal purpose of avoiding the application of section 250(b)(3)(A)(i)(VII)(bb). See proposed §1.250(b)-1(h)(3).

A comment in response to Notice 2025-78 requested a “remanufacturing” exception, such that other excluded property would not include previously depreciated property that is materially transformed or remanufactured into property held for sale as inventory. The commenter noted that companies often lease or use high-value assets in their trade or business and later repurpose, remanufacture, or refurbish such property for sale to unrelated foreign customers. The commenter asserted that including gain from property that reflects new investment, value creation, and foreign-market expansion as excluded property sales income is inconsistent with the treatment of inventory or newly manufactured property, the income and gain from which is not subject to the exclusion in section 250(b)(3)(A)(i)(VII)(bb). The commenter also recommended a depreciation recapture limitation for taxpayers that do not remanufacture property that would limit the portion of the gain from other excluded property to the amount that reflects previously claimed depreciation, with any gain above that amount remaining eligible for DEI and, therefore, FDDEI. Recognizing concerns with related party transactions that obscure prior use or artificially qualify gain for FDDEI, the commenter supported the continued application of the related-party anti-abuse rule under section 3.01(6) of Notice 2025-78, and suggested the depreciation recapture limitation could be inapplicable if the asset was acquired from a related party with a principal purpose of avoiding exclusion.

The proposed regulations would not adopt the requested remanufacturing exception or the depreciation recapture limitation. The Treasury Department and the IRS are of the view that the phrase in section 250(b)(3)(A)(i)(VII)(bb), “other property of a type that is subject to depreciation, amortization, or depletion by the seller,” would include, for example, property that has been subject to any depreciation in the hands of the seller. Thus, property previously depreciated in a trade or business and repurposed, remanufactured, or refurbished into inventory would retain its characterization as property subject to depreciation. Furthermore, the requested depreciation recapture limitation is contrary to section 250(b)(3)(A)(i)(VII), which excludes all income and gain from the sale or other disposition of referenced property and does not suggest a limitation to depreciation recapture. As a result, the proposed regulations do not include the requested exception or limitation.

D. Sales or Other Dispositions

As explained in the Background section of this preamble, the general definition of “sale” for section 250 purposes does not apply for purposes of section 250(b)(3)(A)(i)(VII). Instead, and consistent with section 3.01(2) of Notice 2025-78, the proposed regulations would determine a sale or other disposition for this purpose under general Federal income tax principles and include deemed sales, transactions subject to section 367(d), and other deemed dispositions. Accordingly, any transaction or election that is treated as a sale or other disposition of property for Federal income tax purposes (rather than a sale under the broader definition of “sale” for section 250 purposes that includes leases and licenses) would be considered a sale or other disposition under proposed §1.250(b)-1(h)(2)(iii).

In order to conform to the statutory changes, the proposed regulations would remove and reserve several examples in §1.250(b)-4(d)(2)(iv)(B) that involve the sale of intangible property.

E. Software Transactions

Section 1.861-18 provides rules for classifying transactions involving software and other digital content for purposes of section 250 and certain other provisions. §1.861-18(a)(1). As explained above in part II.B of this Explanation of Provisions section, and consistent with the approach taken in the existing 250 regulations, Notice 2025-78 provided that intangible property does not include a copyrighted article as defined in §1.861-18(c)(3). Two commenters agreed with the approach to exclude copyrighted articles from intangible property in Notice 2025-78 and requested additional examples and clarifications in the software context.

Commenters requested modifying the facts in Example 1 of Notice 2025-78, which illustrates a software transaction that would be treated as a sale of intangible property, to provide additional details on the form of consideration and the transferee’s use of the property. However, the Treasury Department and the IRS are of the view that the sale versus license determination does not depend on the form of consideration or the transferee’s use of the intangible property. See Rev. Rul. 57-40, 1957-1 C.B. 266 (transfer of patent with all substantial rights considered a sale regardless of whether consideration is for productivity, use or disposition of the property transferred); see also E.I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052 (3d Cir. 1970). Therefore, the proposed regulations would not modify the facts of Example 1.

One commenter requested an additional example illustrating that the sale of a copyrighted article by a domestic corporation, whether through an electronic or physical medium, should not be considered a sale of intangible property or other excluded property, even if the domestic corporation uses the software in its own business. The commenter also requested an example illustrating that a “lease” of a copyrighted article, where the term of the arrangement to the customer is of a limited duration, would not be excluded from DEI because there has been no “sale” of property. To provide the additional clarity requested in the software context, the proposed regulations would include the two requested examples. See proposed §1.250(b)-1(h)(4)(ii) (Example 2). The analysis in the first requested example is also illustrated by Example 4 (sale of airplanes) in proposed §1.250(b)-1(h)(4)(iv).

A comment also requested an additional example illustrating that income or gain from a transfer of a copy of a computer program with a limited duration license is not excluded from DEI. Because the comment relates to the characterization of digital content transactions under §1.861-18, it is outside the scope of the proposed regulations. Accordingly, the proposed regulations would not include the requested example.

As a result of the OBBBA amendments to remove the DTIR and DII components from the calculation and replace “foreign-derived intangible income” with “foreign-derived deduction eligible income,” the foreign-derived ratio in §1.250(b)-1(c)(13) is no longer needed to compute the deduction under section 250(a)(1). The OBBBA amendments, however, did not modify the definition of FDDEI, including the treatment of FDDEI as a subset of DEI. See section 250(b)(1) (“The term ‘foreign-derived deduction eligible income’ means...any deduction eligible income which is derived in connection with” certain property and services). Accordingly, the proposed regulations would clarify that FDDEI continues to be limited by the amount of DEI. See proposed §1.250(b)-1(c)(12).

The Treasury Department and the IRS expect to finalize these proposed regulations by January 4, 2027. Pursuant to the authority conferred by section 7805(b)(2), the proposed regulations are generally proposed to apply to sales or other dispositions (as defined in proposed §1.250(b)-1(h)(2)(iii)) occurring after June 16, 2025. See proposed §1.250-1(b). However, the proposed amendment to §1.250(b)-1(c)(12) (clarifying FDDEI is a subset of DEI) would apply to taxable years beginning after December 31, 2025. Taxpayers may rely on the proposed regulations for sales or other dispositions (as defined in proposed 1.250(b)-1(h)(2)(iii)) before the date final regulations are published in the Federal Register, provided the taxpayer and its related parties (within the meaning of §1.250(b)-1(c)(19)) follow the proposed regulations in their entirety and in a consistent manner.

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The proposed regulations have been designated by the Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant and subject to review under section 3(f) of Executive Order 12866 and section 1(c) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB. This rule is expected to be an Executive Order 14192 regulatory action.

A. Background

The Tax Cuts and Jobs Act of 2017 (TCJA), Public Law 115-97, fundamentally revised the U.S. international tax system, including through the enactment of the global intangible low-taxed income (GILTI) regime under section 951A and the FDII deduction under section 250. Congress enacted these provisions in part to reduce incentives for U.S. multinational enterprises to locate or move intangible income abroad, including in low- or zero-tax foreign jurisdictions, and to neutralize tax considerations in choosing whether to serve foreign markets through U.S.-based operations or through CFCs.² Section 250 allows a domestic corporation a deduction equal to a percentage of its FDDEI, which generally consists of DEI derived from property sold to foreign persons for foreign use, and services provided to persons, or with respect to property, located outside the United States. The section 250 deduction lowers the effective corporate tax rate on qualifying income.³

As enacted in 2017, section 250(b)(3)(A)(i) excluded six categories of income from DEI, including Subpart F inclusions, GILTI, financial services income, dividends from controlled foreign corporations, domestic oil and gas extraction income, and foreign branch income. Until the 2025 enactment of section 250(b)(3)(A)(i)(VII), section 250 did not generally exclude income or gain derived from sales or other dispositions of intangible property or depreciable, amortizable, or depletable business property from DEI. As a result, taxpayers could claim FDII benefits with respect to certain dispositions of such property. This treatment could undermine the policy objectives of the TCJA’s changes to the U.S. international tax system, which were principally directed toward curbing erosion of the U.S. tax base through the offshoring of property that generates ongoing foreign-market intangible income.

Section 70322(a)(1) of the OBBBA amended section 250(b)(3)(A)(i) to add a seventh category of income excluded from DEI. Specifically, section 250(b)(3)(A)(i)(VII) excludes from DEI, except as otherwise provided by the Secretary, income and gain from the sale or other disposition of: (i) intangible property within the meaning of section 367(d)(4);⁴ and (ii) other property of a type that is subject to depreciation, amortization, or depletion by the seller (excluded property sales income). The exclusion addresses a narrow category of transactions where taxpayers could obtain a tax benefit for offshoring their intangible property and business operations.

Section 70322(a)(2) of the OBBBA makes a conforming change to the section 250 definition of “sale.” This change prevents the broad section 250 definition of “sale,” which generally includes leases, licenses, exchanges, and other dispositions, from applying to the new income exclusion in section 250(b)(3)(A)(i)(VII). As a result, a sale or other disposition for purposes of the income exclusion in section 250(b)(3)(A)(i)(VII) does not include leases and licenses.

Section 70322(a)(3) of the OBBBA provides that these statutory amendments apply to sales or other dispositions occurring after June 16, 2025. In addition to the Secretary’s express regulatory authority to determine the scope of the exclusion in section 250(b)(3)(A)(i)(VII), the statute grants express regulatory authority to prescribe regulations necessary or appropriate to carry out the provisions of section 250.

On December 4, 2025, the Treasury Department and the IRS issued Notice 2025-78 announcing the intent to issue proposed regulations under section 250.⁴ The notice provided preliminary guidance addressing the scope of excluded property sales income, and included several definitions and examples illustrating the application of the rules.

B. Need for Proposed Regulations

The proposed regulations provide guidance to taxpayers in applying section 250(b)(3)(A)(i)(VII) to the determination of the type and amount of income eligible for the section 250 deduction. The Treasury Department and the IRS are of the view that regulatory guidance would provide administrable standards, reduce uncertainty, improve consistency among similarly situated taxpayers, and prevent inappropriate claims of FDDEI with respect to income from the disposition of intangible property and business assets that Congress excluded from DEI.

C. The Proposed Regulations

Consistent with Notice 2025-78, the proposed regulations provide rules to determine when income and gain from the disposition of property would be treated as excluded property sales income, including any income and gain derived from the sale or other disposition of (i) intangible property, or (ii) property that in the hands of a seller: (a) is or has been treated as property that is of a character subject to the allowance for depreciation under section 167, (b) is or has been subject to an allowance for amortization, or (c) is or has been subject to the allowance for depletion under section 611. In particular, as discussed in the Explanation of Provisions section of this preamble, the proposed regulations would (i) provide definitions consistent with existing statutory and regulatory provisions; (ii) pursuant to the authority granted to the Secretary of the Treasury in section 250(b)(3)(A)(i)(VII) and section 250(c), clarify that income and gain from the sale of copyrighted articles and property that has always been held as inventory by the seller would not be treated as excluded property sales income, with the latter subject to a related party anti-abuse rule; and (iii) modify certain regulations under section 250 to reflect amendments under the OBBBA and clarify that FDDEI remains a subset of DEI.

D. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations.

E. Economic Effects of the Proposed Regulations

1. Affected taxpayers

The broadest measure of taxpayers potentially affected by the proposed regulations includes all taxpayers that claim an FDII deduction under section 250 on Form 1120, “U.S. Corporation Income Tax Return” (or any successor form). The Treasury Department and the IRS have determined that between 2018 and 2023, the number of Form 1120 filers that had claimed an FDII deduction has increased from 4,000 to 6,900. The estimated number of FDDEI claimants in 2026 is expected to range from 7,000 to 7,500. However, only a subset of those taxpayers is expected to be affected by the statutory change, and an even smaller subset is expected to be materially affected by the proposed regulations relative to the statutory baseline.

The statutory amendment excludes certain categories of sales income from DEI, potentially affecting a subset of all FDII claimants, i.e., taxpayers that recognize income or gain from the sale or other disposition of intangible property, or depreciable, amortizable, or depletable property used in a trade or business.

Available data do not allow the Treasury Department and the IRS to identify the exact transactions or product types that contribute to each taxpayer’s FDII deduction. However, Form 8993 reports gross FDDEI by three income categories: sales of general property, sales of intangible property,⁷ and services. Table 2 uses these data to present, by industry, the number of taxpayers claiming an FDII deduction in tax year 2021 and their aggregate gross FDDEI by income category.

Gross FDDEI is narrowed further by taking into account allocated and apportioned deductions to get to net FDDEI, the income base on which the section 250 deduction is computed. Accordingly, gross FDDEI exceeds net FDDEI, a portion of which becomes the final section 250 deduction amount. In tax year 2021, taxpayers reported $912 billion of aggregate gross FDDEI, as shown in Table 2, compared to $112 billion of aggregate section 250 deductions for FDII.⁸

With these limitations in mind, the gross FDDEI data nevertheless provide useful information about the industries in which affected transactions are more likely to arise. Firms in certain industries are more likely to be affected by the statute because they generate income from intangible property or use production assets that are depreciable, amortizable, and depletable. Firms in the Information industry (e.g., publishers and software producers) are more likely to engage in transactions involving intangible property. In 2021, 9 percent of all firms claiming a FDII deduction (about 500 by count) are characterized as such, and they account for 55 percent of the gross FDDEI derived from all sales of intangible property. Similarly, firms in the Manufacturing industry may be more likely to use and sell assets that are depreciable, amortizable and depletable.⁹ In 2021, 31 percent of all firms claiming a FDII deduction (about 1,710 by count) are characterized as manufacturing firms, and they account for 46 percent of the gross FDDEI derived from all sales of general property.

The population materially affected by the proposed regulations would be narrower. The proposed regulations primarily affect taxpayers whose transactions raise interpretive or characterization issues addressed in the regulations. The subset of taxpayers materially affected by the proposed regulations, relative to the statutory baseline, likely includes taxpayers with transactions involving copyrighted articles and taxpayers disposing of mixed-use property.

While the Treasury Department and the IRS do not have the data or models required to precisely estimate the number of taxpayers affected by the proposed regulations, they expect the proposed regulations to primarily affect taxpayers that currently claim FDII deductions on income and gain derived from significant asset disposition transactions. The proposed regulations are not expected to materially affect corporations that do not claim FDII deductions; do not engage in significant sales or other dispositions of property of a type that is subject to depreciation, amortization, or depletion (other excluded property); and do not engage in transactions involving the interpretive issues addressed by the proposed regulations.

2. Economic effects

The proposed regulations are expected to provide clarity and certainty regarding the treatment of income and gains from sales of copyrighted articles (including software), and inventory. Taken together, the proposed regulations would reduce inconsistent treatment among similarly situated taxpayers, legal disputes arising from ambiguous reading of the statute, compliance costs associated with uncertain tax positions, and incentives to structure transactions to exploit ambiguity.

a. Clarify meanings of relevant terms

The proposed regulations clarify two sets of terms that determine the scope of excluded property sales income under section 250(b)(3)(A)(i)(VII). First, the proposed regulations clarify that, for purposes of this exclusion, a “sale or other disposition” is determined under general tax principles and does not include a transaction characterized as a lease or license. Second, the proposed regulations define other excluded property by reference to existing depreciation, amortization, depletion, and inventory concepts, rather than creating a new section 250-specific property classification regime.

i. Clarify the meaning of “sale”

The statute amends the definition of “sale” in section 250 to provide that the broad section 250 definition of sale, which includes any lease, license, exchange or other disposition, does not apply for purposes of the income exclusion in section 250(b)(3)(A)(i)(VII). In other words, Congress indicated that the income exclusion in section 250(b)(3)(A)(i)(VII) should apply only to transactions that are treated as sales or other dispositions (including deemed sales and dispositions), and not to other categories of transactions, such as those characterized as leases or licenses.

Consistent with Notice 2025-78, the proposed regulations would further clarify this distinction and provide that a sale or other disposition for purposes of section 250(b)(3)(A)(i)(VII) is determined under general Federal income tax principles and includes deemed sales, deemed dispositions, and transactions subject to section 367(d). A transaction characterized as a lease or license under general tax principles would not be treated as a sale or other disposition, and income from such transactions would therefore not be excluded from DEI under section 250(b)(3)(A)(i)(VII), although the income would remain subject to the other requirements and limitations of section 250.

This clarification is expected to reduce uncertainty for taxpayers that earn income from software, technology, intellectual property, equipment leasing, and other arrangements that may involve both sale and license or lease features. It provides a clear distinction between disposition income, which Congress excluded from DEI, and income from lease or license arrangements, which may remain in DEI if it otherwise qualifies. This distinction is particularly relevant for owners of intangible property because taxpayers may exploit intellectual property through several different transaction forms, including outright sales, transfers of copyright rights, licenses, and transactions that are treated as services or cloud transactions under existing rules. Some of these transaction forms may generate the type of foreign-market income that Congress intended to encourage through the section 250 deduction, while others may involve dispositions that facilitate the offshoring of intellectual property or business assets and are therefore excluded from DEI under section 250(b)(3)(A)(i)(VII).

The proposed approach allows taxpayers to apply existing general Federal income tax principles to determine whether a transaction is a sale or other disposition for purposes of section 250(b)(3)(A)(i)(VII). An alternative framework would be to create a separate section 250-specific characterization regime, including rules identifying particular categories of transactions that would or would not qualify as sales or other dispositions. The Treasury Department and the IRS do not view this as a sound alternative. Such a regime would introduce special classification rules for a narrow purpose, increasing compliance burdens, administrative complexity, and disputes over economically similar transactions. It also would need to be coordinated with OBBBA’s conforming amendment to the section 250 definition of sale, which prevents the broad, general section 250 definition of sale from applying for purposes of section 250(b)(3)(A)(i)(VII). By relying instead on general tax principles, the proposed regulations reduce the need for taxpayers to characterize the same transaction differently for section 250 than for other Federal income tax purposes.

Accordingly, under the proposed regulations, excluded property sales income does not include income or gain from the lease or license of property. This approach avoids collapsing the statutory distinction between a disposition of property and an ordinary lease or license arrangement. For example, treating license income as excluded sales income could cause a taxpayer earning royalties from a license of intangible property to be treated the same as a taxpayer that sells the underlying intangible property, even though the legal and economic consequences of those transactions may differ materially. This could create distortions among transaction forms and overextend the exclusion beyond income and gain from sales or other dispositions of specified property.

ii. Provide definitions consistent with existing statutory and regulatory provisions

The proposed regulations generally define the key categories of other excluded property by reference to existing statutory and regulatory concepts. Other excluded property would include property that is not intangible property and that, in the hands of the seller, is or has been treated as property of a character subject to the allowance for depreciation under section 167, is or has been subject to an allowance for amortization, or is or has been subject to the allowance for depletion under section 611. Therefore, property that has always been held as inventory by the seller would not be other excluded property because such property has not been “of a character” subject to the allowance for depreciation. The proposed regulations also coordinate this definition with the existing definitions of intangible property and copyrighted articles.

Using existing statutory and regulatory concepts is expected to reduce administrative burden. Taxpayers generally already classify property for purposes of depreciation, amortization, depletion, inventory accounting, and gain characterization. By relying on familiar concepts, the proposed regulations reduce the need for taxpayers to apply a new property classification system solely for section 250. This approach also promotes consistent treatment between section 250 and other Federal income tax provisions that already determine whether property is depreciable, amortizable, depletable, inventory, or intangible property.

The direct definitional approach is expected to be particularly helpful for taxpayers with mixed categories of property, including manufacturers, software companies, natural resource businesses, and taxpayers that hold both business-use assets and inventory. These taxpayers may sell property that is depreciable in one context but inventory in another. The proposed regulations would provide a more targeted rule by focusing on the character of the property in the hands of the seller and by distinguishing ordinary-course inventory sales from dispositions of the seller’s own depreciable, amortizable, or depletable business assets.

The proposed definitions are also expected to reduce disputes over borderline property categories. Without regulatory clarification, taxpayers could take inconsistent positions regarding whether section 250(b)(3)(A)(i)(VII)(bb) applies to fully depreciated property, amortizable property, depletable property, software, inventory, or property that changes use before sale. The proposed regulations would reduce these uncertainties by providing definitions tied to established Code provisions and by adding targeted rules for related-party transfers and reclassified property.

b. Clarify intangible property does not include copyrighted articles

The proposed regulations would clarify that, for purposes of section 250(b)(3)(A)(i)(VII)(aa), intangible property does not include a copyrighted article. This rule distinguishes between a disposition of copyright rights, which may be excluded from DEI as a sale or other disposition of intangible property, and a sale of an article embodying copyrighted content, which is not excluded from DEI solely because the article is protected by copyright. A copyrighted article may nevertheless be excluded from DEI if the separate exclusion for property of a type subject to depreciation, amortization, or depletion applies.

Ideally, the Treasury Department and the IRS would estimate the economic effect of this clarification using tax return data that directly identify FDDEI attributable to sales of copyrighted articles. Available tax return data do not separately identify those transactions. The Treasury Department and the IRS therefore considered industry information as a proxy for identifying taxpayers more likely to engage in affected transactions, given that certain businesses are more likely than others to sell copyrighted articles. This proxy is necessarily imperfect: taxpayers within an industry may earn income from multiple activities, and only some of those activities may involve sales of copyrighted articles. Nonetheless, industry information can help assess the size of the relevant taxpayer population.

Taxpayers in the Information industry are expected to be among the taxpayers most likely to be affected because they are more likely than taxpayers in other industries to sell software, digital media, publications, or other products embodying copyrighted content. As noted above, in 2021 approximately 500 taxpayers claiming an FDII deduction, or 9 percent of the total, were in the Information industry. Total gross FDDEI reported by FDII claimants in the information industry totaled $248 billion, $150 billion of which was FDDEI from sales of intangible property, which likely includes sales of copyrighted software and other digital content.

The principal economic effect of this rule is expected to be increased certainty. Absent clarification, taxpayers could interpret the statutory reference to section 367(d)(4) intangible property to include copyrighted articles merely because the articles embody copyrighted content. That interpretation could create uncertainty for taxpayers that sell software copies, publications, or other copyrighted products to foreign customers. The proposed regulations would reduce that uncertainty by applying the existing Federal income tax distinction between copyright rights and copyrighted articles.

The clarification is also expected to reduce distortions across transaction forms. Producers of software and digital-content products may earn revenue through multiple formats, including sales of copies, licenses, cloud transactions, services, and transfers of copyright rights. Treating sales of copyrighted articles as excluded property sales income solely because the articles embody copyrightable content could disadvantage sales of copyrighted articles relative to other transaction forms, including certain licenses, cloud transactions, and services. That result would not align with the statutory exclusion, which is directed at dispositions of intangible property rather than ordinary-course sales of copyrighted articles. The proposed regulations reduce this risk by preserving potential DEI treatment for qualifying foreign sales of copyrighted articles while continuing to exclude dispositions of the underlying copyright or other section 367(d)(4) intangible property.

Relative to the baseline, the proposed rule is expected to reduce inconsistent treatment among similarly situated taxpayers, reduce disputes over the characterization of software and digital-content transactions, and reduce incentives to structure transactions based on uncertainty over whether a copyrighted article is treated as intangible property. Any affected amount of income would depend on the volume of foreign sales of copyrighted articles, the extent to which those sales otherwise satisfy the FDDEI requirements, and the extent to which taxpayers sell or otherwise dispose of copyright rights rather than copyrighted articles.

c. Clarify other excluded property does not include inventory

Section 250(b)(3)(A)(i)(VII)(bb), as added by OBBBA, excludes from DEI, except as otherwise provided by the Secretary, income and gain from the sale or other disposition of other excluded property. The proposed regulations would clarify that other excluded property means property that is or has been of a character subject to the allowance for depreciation, or is or has been subject to an allowance for amortization or depletion. Therefore, other excluded property would not include property that has always been held as inventory by the seller and has not been “of a character” subject to the allowance for depreciation. This inventory carveout is particularly relevant for manufacturers and other producers that use depreciable assets as means of production and sell products that may themselves be depreciable in the hands of the purchaser.

Without this clarification, taxpayers could interpret section 250(b)(3)(A)(i)(VII)(bb) to exclude income and gain from sales of ordinary-course inventory from DEI, merely because the property sold is of a kind that could be depreciated, amortized, or depleted by the seller. For example, a manufacturer may sell aircraft, machinery, equipment, vehicles, software copies, or other business-use products to foreign customers. Although such property may serve as means of production and therefore be of a type subject to depreciation, amortization, and depletion in the hands of the seller, income from the seller’s ordinary-course inventory sales is the type of foreign-market sales income that section 250 is generally designed to identify as potentially eligible for FDDEI treatment, provided the other statutory and regulatory requirements are satisfied.

The Treasury Department and the IRS expect this clarification to reduce uncertainty for taxpayers engaged in manufacturing, distribution, and other businesses that sell inventory or similar property for foreign use. In particular, this clarification avoids uncertainty in the application of the statutory exclusion. If inventory were treated as other excluded property solely because the property is of a type that could be depreciated, amortized, or depleted by the seller, then the exclusion could apply broadly to ordinary foreign-market sales of manufactured products. Such a broad exclusion could substantially narrow the category of income that would otherwise be considered as FDDEI, which would dampen the intended incentive for domestic corporations to serve foreign markets from the United States. The asset-by-asset approach adopted in the proposed regulation instead distinguishes between a seller’s disposition of its own business assets and the seller’s ordinary-course sales of inventory, achieving the goal of discouraging dispositions of production assets that Congress determined should not give rise to FDDEI, while preserving the treatment of ordinary-course inventory sales for foreign use.

The proposed regulations also include a related-party anti-abuse rule intended to prevent taxpayers from using the inventory clarification to avoid excluded property sales income treatment through related-party transactions. The inventory clarification is intended to preserve DEI treatment for legitimate ordinary-course sales of inventory to foreign customers, not to permit taxpayers to avoid the statutory exclusion by moving depreciable, amortizable, or depletable property through related parties or intermediary entities before sale.

Under this rule, property generally retains its other excluded property character when it is transferred within a modified affiliated group in a basis-carryover transaction, if the transfer has a principal purpose of avoiding the exclusion for other excluded property. Thus, a taxpayer could not avoid the income exclusion set forth in section 250(b)(3)(A)(i)(VII)(bb) merely by transferring depreciable, amortizable, or depletable property to a related party that holds the property as inventory before selling it to a foreign customer. This rule serves as a backstop to the inventory clarification, so that the clarification protects ordinary-course inventory sales without allowing taxpayers to convert excluded property sales income into FDDEI through related-party reclassification or similar transactions. The related party anti-abuse rule is expected to reduce incentives for taxpayers to transfer depreciable property through nonrecognition or basis-carryover transactions, reclassify other excluded property through intermediary entities, or otherwise structure related-party transactions to convert excluded property sales income into FDDEI.

Together, these rules are expected to improve consistency between the economic substance of a transaction and its treatment for DEI purposes. They may reduce tax planning activity associated with asset characterization and related-party transfers, reduce disputes over whether inventory treatment should be respected for DEI purposes, and reduce the likelihood that similarly situated taxpayers will take inconsistent positions. The principal compliance effect is expected to be the need for taxpayers engaging in related-party transfers, basis-carryover transactions, or inventory reclassification transactions to evaluate whether the rules apply and maintain records supporting their treatment.

The economic effects of not treating ordinary course inventory sales as excluded property sales income are expected to be concentrated in industries with significant foreign sales of tangible products or software and digital products, including manufacturing, transportation equipment, industrial machinery, electronics, pharmaceuticals, and software. In 2021, 1,710 taxpayers from the Manufacturing industry (broadly defined) claimed a FDII deduction, representing 31 percent of all FDII deduction claimants. Total gross FDDEI reported by FDII claimants in the Manufacturing industry totaled $343 billion, $189 billion of which was FDDEI from sales of general property, which likely includes sales of inventory or productive assets.

d. Summary

Based on the available models and data, the Treasury Department and the IRS estimate that the economic costs and benefits of the proposed regulations would be small. The Treasury Department and the IRS invite public comments and additional data on the economic effects that would result from these proposed regulations.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the Office of Management and Budget before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The collections of information in these proposed regulations include recordkeeping requirements that are necessary for domestic corporations to properly exclude certain income and gain from the sale or disposition of property from DEI. These collections will be used by IRS for tax compliance purposes.

These proposed regulations contain rules to determine whether income and gain from the sale or disposition of certain property is excluded from DEI. Taxpayers should maintain records sufficient to substantiate compliance with the exclusion rules. These recordkeeping requirements are considered general tax records under §1.6001-1(e). For PRA purposes, general tax records are already approved by OMB under 1545-0123 for business filers.

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency to prepare and make available for public comment an initial regulatory flexibility analysis that will describe the impact of the proposed rule on small entities. See 5 U.S.C. 603(a). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a substantial economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. See U.S.C. 601(3) through (6).

It is hereby certified that the proposed regulations will not have a significant economic impact on a substantial number of small entities. These regulations affect domestic corporations with foreign-derived deduction eligible income. Although data are not readily available, the Treasury Department and the IRS have determined that the regulations may affect a substantial number of small entities. The Treasury Department and the IRS do not expect that the proposed regulations will have a significant economic impact on affected small entities within the meaning of sections 601(3) through (6) of the RFA. The proposed regulations provide guidance on certain excluded property sales income from deduction eligible income under section 250 but do not change the economic impact of the existing regulations or impose any new costs on small entities. Notwithstanding this certification, the Treasury Department and the IRS welcome comments from the public about the impact of these regulations on small entities.

Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2026, that threshold is approximately $214 million. The proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. The proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive Order.

Section 401(a) of PRWORA (8 U.S.C. 1611(a)) provides that aliens who are not qualified aliens (as that term is defined in 8 U.S.C. 1641) are not eligible for any Federal public benefit (as defined in 8 U.S.C. 1611(c)), with certain narrow exceptions.¹

Section 401(c)(1)(B) of PRWORA (8 U.S.C. 1611(c)(1)(B)) defines the term “Federal public benefit,” in relevant part, as “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.”

Section 431(b) of PRWORA (8 U.S.C. 1641(b)) defines the term “qualified alien” as “an alien who, at the time the alien applies for, receives, or attempts to receive a Federal public benefit is: (1) an alien who is lawfully admitted for permanent residence under the Immigration and Nationality Act, (2) an alien who is granted asylum under section 208 of such Act, (3) a refugee who is admitted to the United States under section 207 of such Act, (4) an alien who is paroled into the United States under section 212(d)(5) of such Act for a period of at least 1 year, (5) an alien whose deportation is being withheld under section 243(h) of such Act (as in effect immediately before the effective date of section 307 of division C of Public Law 104-208) or section 241(b)(3) of such Act (as amended by section 305(a) of division C of Public Law 104-208), (6) an alien who is granted conditional entry pursuant to section 203(a)(7) of such Act as in effect prior to April 1, 1980, (7) an alien who is a Cuban and Haitian entrant (as defined in section 501(e) of the Refugee Education Assistance Act of 1980), or (8) an individual who lawfully resides in the United States in accordance with a Compact of Free Association referred to in section 1612(b)(2)(G) of [title 8].”

The term “qualified alien” also includes certain aliens who have been battered or subject to extreme cruelty in the United States provided they meet certain requirements including a substantial connection between such battery or cruelty and the need for the benefits to be provided. See 8 U.S.C. 1641(c).

Section 404 of PRWORA (8 U.S.C. 1614) requires each Federal agency that administers a program to which section 1611 of title 8, United States Code, applies, to post information and provide general notification to the public and to program recipients of the changes regarding eligibility for such Federal public benefits.

Prior to 2018, the Treasury Department and the IRS had not viewed tax benefits, including refundable credits, as constituting Federal public benefits under PRWORA. In 2018, the Treasury Department began to reconsider the potential applicability of PRWORA’s eligibility restrictions to the refunded portions of three individual refundable income tax credits: (1) the earned income credit under section 32 (EITC), (2) the child tax credit under section 24 (CTC), and (3) the American opportunity tax credit under section 25A (AOTC). In connection with that reconsideration, the General Counsel’s office of the Treasury Department requested an opinion from the Office of Legal Counsel (OLC) at the Department of Justice as to whether the refundable portions of each of these three credits “may reasonably be construed as a ‘Federal public benefit’ within the meaning of PRWORA’s provision on aliens’ ineligibility for such benefits.”²

On December 9, 2020, OLC sent a memorandum to the General Counsel of the Treasury Department opining that the refunded portion of the named tax credits may reasonably be construed as a “Federal public benefit” for which nonqualified aliens are generally ineligible under PRWORA.³ OLC reasoned that the EITC, CTC, and AOTC provide direct payments to individual taxpayers and households; are materially similar to other kinds of monetary payments that the Federal government makes to individuals outside of the tax system; and each satisfies PRWORA’s definition of a Federal public benefit either as a welfare benefit, postsecondary education benefit, or other similar benefit. The 2020 OLC Opinion stated, however, that “you have not asked us to consider, and we do not reach, the question whether this is the only permissible reading of the statute.”⁴

On February 19, 2025, President Trump issued Executive Order 14218, Ending Taxpayer Subsidization of Open Borders (90 FR 10581). The Executive Order directs Federal agencies, among other actions, to identify federally funded programs administered by the agency and to ensure that such programs are operating in compliance with Title IV of PRWORA.⁵

Following the issuance of Executive Order 14218, the Treasury Department submitted a second request to OLC asking whether the interpretation that was the subject of the 2020 OLC Opinion represents the best reading of the law, in light of Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024). This second request also asked whether the refunded portions of the premium tax credit (PTC) under section 36B and the Saver’s Match under section 6433 of the Code constitute Federal public benefits. On November 19, 2025, in response, OLC issued a Memorandum Opinion to the General Counsel of the Treasury Department concluding that the interpretation addressed in the 2020 OLC Opinion reflects the best view of the law and that the refunded portions of the credits addressed in the 2020 OLC Opinion, as well as the PTC and the Saver’s Match, are Federal public benefits under PRWORA.⁶

A. Individual Refundable Income Tax Credits

In general, a tax credit is an amount allowable as a reduction of tax liability for the purpose of computing the tax or refund due. A tax credit reduces a taxpayer’s liability dollar for dollar. Tax credits are available to all taxpayers who meet the eligibility requirements of the particular credit. If an amount allowable as a refundable credit exceeds the tax imposed by subtitle A of the Code (subtitle A) (reduced by any applicable nonrefundable credits), the amount of that excess is considered to be an overpayment of tax, which the IRS may credit against any existing Federal tax liabilities of the taxpayer and must, subject to certain mandatory offsets, refund any balance to the taxpayer. Sections 6401(b)(1) and 6402(a).

In general, to determine the overpayment amount attributable to a refundable tax credit, an individual taxpayer first determines the taxpayer’s taxable income for the tax year pursuant to section 63 of the Code and calculates the amount of tax on the taxable income pursuant to section 1 of the Code. The taxpayer then adds any additions to tax under chapter 1 of the Code (chapter 1), such as excess advance payments of the PTC and repayment of certain other credits, and other taxes imposed by subtitle A, such as the tax on self-employment income. Once the total subtitle A income tax liability is calculated, the taxpayer reduces that amount by the amount of the credits allowable under subparts A, B, D and G of part IV of subchapter A of chapter 1. If this reduced tax liability amount is exceeded by the amount of any refundable tax credits under subpart C of part IV of subchapter A of chapter 1, the excess is an overpayment available for refund, credit, or offset. See sections 6401(b)(1) and 6402(a) of the Code.

B. Adoption Tax Credit

Section 23 of the Code allows an individual to claim a tax credit for qualified adoption expenses paid or incurred in connection with an eligible child. Beginning in 2025, under section 23(a)(4), up to $5,000 (adjusted for inflation for future years) of the credit is refundable.⁷ Section 23(b)(2)(A) imposes income limitations and section 23(h) provides several adjustments for inflation, such as on the income limitations, the cap on qualified adoption expenses, and the cap on the refundable portion of the credit. For example, for taxable year 2025, the adoption tax credit phases out for individuals with adjusted gross income (AGI) over $259,190 and is fully eliminated for individuals with AGI of $299,190 or more.

The adoption tax credit is claimed by an individual on a Federal income tax return, and Form 8839, Qualified Adoption Expenses. Section 23(f)(1) of the Code requires married individuals to file a joint return to claim the credit unless they meet certain requirements. Section 23(f)(2) of the Code requires the individual to provide the name, age, and tax identification number (TIN) of the adopted child.

C. Child Tax Credit

Section 24(h)(2) of the Code allows eligible taxpayers with a qualifying child or children to claim a CTC of up to $2,200 for 2025 (adjusted for inflation for future years) per qualifying child.⁸ The CTC is made up of a nonrefundable and refundable component. If the taxpayer has insufficient Federal income tax liability, the taxpayer may be eligible for the refundable portion of the CTC, generally called the Additional Child Tax Credit (ACTC). The ACTC, under section 24(d) of the Code, is generally calculated using the earned income formula. This formula allows for a refundable credit equal to 15% of the taxpayer’s earned income in excess of $2,500, up to a maximum of $1,700 per child for 2025 (adjusted for inflation for future years). Under section 24(h)(3) of the Code, the CTC (including the ACTC portion) phases out for taxpayers with modified AGI over $200,000 and married individuals who file joint returns with modified AGI over $400,000.⁹ The actual modified AGI level at which the credit equals zero is dependent on the number of qualifying children of the taxpayer.

The CTC is claimed by a taxpayer on a Federal income tax return and Schedule 8812, Credits for Qualifying Children and Other Dependents. For taxable years beginning after December 31, 2024, section 24(h)(7) of the Code requires the taxpayer to include the social security number (SSN) of the qualifying child and of the taxpayer (or, in the case of a joint return, the SSN of at least one spouse ).¹⁰ For purposes of the CTC, an SSN qualifies only if it is issued—(i) to a citizen of the United States or pursuant to subclause (l) (or that portion of subclause (III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security Act (a work eligible SSN), and (ii) before the due date for such return. For taxpayers filing a joint return, only one spouse is required to have a work eligible SSN. The other spouse must have an SSN issued by the Social Security Administration or an individual taxpayer identification number (ITIN) issued by the IRS on or before the due date of the return.

D. American Opportunity Tax Credit

Section 25A(a)(1) of the Code allows an individual to claim a tax credit for qualified education expenses paid for an eligible student for the first four years of postsecondary education. Section 25A(b)(1) of the Code limits the maximum annual credit to $2,500 per eligible student. Under section 25A(i) of the Code, 40% of the credit amount is refundable. Under section 25A(d) of the Code, the available credit begins to phase out when the individual’s modified AGI reaches $80,000 ($160,000 for joint filers) and is completely phased out at $90,000 ($180,000 for joint filers). Under section 25A(g)(7), an individual who is a nonresident alien for any portion of the taxable year cannot claim the AOTC unless the individual elects to be treated as a U.S. resident alien under section 6013(g) or (h) of the Code.

The AOTC is claimed by an individual on a Federal income tax return and Form 8863, Education Credits (American Opportunity Credit and Lifetime Learning Credits). Section 25A(g)(6) of the Code requires married individuals to file a joint return to claim the AOTC, unless they meet certain requirements. For taxable years beginning after December 31, 2025, section 25A(g)(1) of the Code requires the individual to include the SSN of the individual filing the return and of the individual for whom the qualified education expenses were paid if such individual is other than the taxpayer or the taxpayer’s spouse.¹¹ For purposes of the AOTC, an SSN must be a work eligible SSN issued to an individual by the Social Security Administration before the due date for such return.

E. Earned Income Credit

Section 32(a) of the Code allows taxpayers with earned income to claim a refundable tax credit in an amount calculated using the taxpayer’s earned income and the credit percentage and income amount specified in section 32(b) of the Code. Eligibility for the credit and the amount allowed as a credit are based upon a number of factors, including the taxpayer’s earned income, AGI, investment income, number of qualifying children of the taxpayer as of the end of the taxpayer’s tax year, U.S. residency, and identification requirements. Section 32(c) of the Code requires the individual’s qualifying children to meet the relationship, residency, and age requirements for purposes of claiming the credit. Section 32(c) of the Code also allows individuals who meet certain age and U.S. residency requirements to claim the EITC if they do not have qualifying children.

Individuals with income above certain thresholds, which vary based on marital status and number of qualifying children, are ineligible for the EITC. Section 32(c)(1)(D) of the Code does not allow an individual who is a nonresident alien for any portion of the taxable year to claim the credit unless the individual elects to be treated as a U.S. resident under section 6013(g) or (h) of the Code.

The EITC is claimed by an individual on a Federal income tax return. Section 32(d) of the Code requires married individuals to file a joint return to claim the credit, unless they meet certain requirements. If the individual is claiming the EITC for a qualifying child, the individual must also file Schedule EIC, Earned Income Credit. Section 32(m) of the Code requires the individual to provide the SSN for themselves, their spouse if married, and any qualifying children. For purposes of the EITC, the SSN must be (i) issued to an individual by the Social Security Administration (other than an SSN issued pursuant to clause (II) (or the portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i)) of the Social Security Act), and (ii) issued on or before the due date for filing the return for the taxable year.

F. Premium Tax Credit

Section 36B provides a PTC to applicable taxpayers who meet certain eligibility requirements, and who enroll themselves, or enroll a member of the taxpayer’s family, in a qualified health plan (QHP) through an Exchange. An individual is not eligible to enroll in a QHP if the individual is not, or is not reasonably expected to be for the entire period for which enrollment is sought, a citizen or national of the U.S., or an alien lawfully present in the U.S. See section 1312 of the Affordable Care Act (ACA) (42 U.S.C. 18032).¹² Section 36B(e)(1)(A) provides that if one or more individuals in a taxpayer’s family (including the taxpayer) are aliens not lawfully present in the U.S., the enrollment premiums and adjusted monthly premiums for the applicable benchmark plan otherwise taken into account in determining the taxpayer’s PTC must be reduced by the portion of such premiums attributable to the individuals who are aliens not lawfully present in the U.S. The OBBBA amended section 36B(e)(1) to provide that for tax years beginning after December 31, 2026, such premiums must also be reduced for aliens who are lawfully present in the U.S. but who are not eligible aliens, a narrower category of non-citizens.

G. Saver’s Match

Section 6433 allows certain low- and moderate-income individuals who make qualified retirement savings contributions to receive matching contributions of up to $1,000 (Saver’s Match contributions) paid by the Secretary of the Treasury or the Secretary’s delegate (Secretary) to applicable retirement savings vehicles for tax years beginning after December 31, 2026. Eligible individuals may elect to have matching contributions of less than $100 “treated as a credit allowed by subpart C of part IV of subchapter A of chapter 1.” Section 6433(a)(2)(B).

H. Application of Federal Public Benefit Definition

PRWORA defines “Federal public benefit”, in relevant part, to encompass certain types of benefits 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.¹³ In analyzing this definition’s application to individual refundable income tax credits, OLC first examined whether the refunded portion of such credits constitutes a “benefit.”¹⁴ OLC opined that the refunded portion of such credits is a benefit based on the ordinary meaning of the word since it results in a payment from the Federal government to the taxpayer that goes beyond a return of money paid by the taxpayer to the Federal government.¹⁵

OLC also opined that the refunded portion of individual refundable income tax credits provides a “payment” because it gives the taxpayer money that the taxpayer did not earn and would not have received but for the existence of the government program.¹⁶ OLC distinguished the refunded portion of individual refundable income tax credits from an “ordinary tax refund,” which it described as a return to the taxpayer of his own money that Treasury had held until the taxpayer’s net obligations for the tax period could be settled. Finally, OLC opined that the refunded portion of an individual refundable income tax credit is provided to an individual, household, or family eligibility unit (that is, the taxpayer, who is either an individual or the joint-filing members of a household) by an agency (the Treasury Department, through the IRS) or by appropriated funds of the United States (namely the permanent indefinite appropriation of amounts necessary for refunding internal revenue collections in 31 U.S.C. 1324).¹⁷

After concluding this general analysis, OLC next considered whether each of the EITC, ACTC, and AOTC falls within the kinds of benefits identified in 8 U.S.C. 1611(c)(1)(B), which are “any retirement, welfare, health, disability, public or assisted housing, postsecondary education, food assistance, unemployment benefit or any other similar benefit. . . .”¹⁸ OLC opined that both the EITC and the ACTC are welfare or other similar benefits and that the AOTC is a postsecondary education benefit. In 2025, OLC opined that the PTC is a health or similar benefit and the Saver’s Match is a retirement or similar benefit.¹⁹ In sum, OLC concluded that the refunded portion of the EITC, ACTC, AOTC, PTC, and Saver’s Match are “Federal public benefits” as defined in PRWORA. The Treasury Department and the IRS incorporate the reasoning and conclusions of the 2020 and 2025 OLC Opinions for purposes of these proposed regulations unless otherwise described in this preamble.

The proposed regulations would apply PRWORA to the following individual refundable income tax credits: the (1) adoption tax credit, (2) CTC, (3) AOTC, and (4) EITC, collectively referred to as the “affected refundable tax credits” in this notice of proposed rulemaking. While the adoption tax credit, which was made partially refundable by the OBBBA²⁰, has not been addressed by OLC, it is included in the proposed regulations as a “similar benefit.” Though the list of enumerated benefits in section 401(c)(1)(B) of PRWORA does not include any items that relate to adoption, the Department of Health and Human Services (HHS) has determined that Federal adoption assistance benefits are Federal public benefits.²¹ The adoption tax credit, although not identical, is sufficiently similar to Federal adoption assistance benefits in that it provides a Federal incentive to promote adoptions, and thus, it would make sense to treat it the same way for purposes of PRWORA. Accordingly, the proposed regulations would treat the refunded portion of the adoption tax credit as a Federal public benefit within the meaning of PRWORA.

The proposed regulations would not apply PRWORA to the refunded portion of the PTC. Although OLC determined that the refunded portion of the PTC is a Federal public benefit for purposes of PRWORA, it stated that its conclusion does not automatically mean that all aliens who are not qualified aliens under PRWORA are ineligible to receive it, noting that “Congress can always supersede existing statutes, including PRWORA, with later-[en]acted laws.”²² OLC further noted that Congress addressed restrictions on the PTC by including specific statutory language on immigration status in two later-enacted statutes, the ACA and OBBBA. See section 36B(e) (limiting the PTC for the coverage of an alien to aliens lawfully present for tax years beginning before January 1, 2027, and to eligible aliens for tax years beginning after December 31, 2026). The proposed regulations would not apply PRWORA to the refunded portion of the PTC based on the view that these restrictions supersede and override PRWORA. Under both the ACA and OBBBA, Congress specifically addressed immigration status as it relates to the computation of and eligibility for the PTC. As an example, under the ACA, Congress allowed only U.S. citizens, U.S. nationals, or “lawfully present” aliens to enroll in a QHP through an Exchange, and a taxpayer could only receive the PTC for the coverage of these enrollees. Congress also provided a special rule that allowed aliens lawfully present in the U.S. who were ineligible for Medicaid because of their immigration status to receive the PTC despite having household income that generally would make them ineligible for the PTC. See section 36B(c)(1)(B) as in effect for taxable years beginning on or before December 31, 2025. Thus, for PTC purposes, Congress not only restricted the allowance of the PTC on the basis of specific immigration status, but it specifically allowed those who were ineligible for Medicaid, due to the PRWORA limitations, to receive the PTC. Under the OBBBA, Congress further restricted aliens’ eligibility for the PTC by disallowing a PTC for the coverage of aliens who are not “eligible aliens,” a narrower category than qualified aliens under PRWORA. See section 36B(e)(2).

In addition, the OBBBA enacted a new program to be administered under the Code, the Trump Accounts Contribution Pilot Program. Although not a tax credit, section 6434 of the Code provides for a one-time, $1,000 pilot program contribution paid by the Secretary into an eligible child’s Trump account.²³ Contributions under the Pilot Program are restricted to children who are U.S. citizens. See section 6434(c)(3). Accordingly, there is no need to determine whether the Trump Accounts Contribution Pilot Program is a Federal public benefit under PRWORA because, even if it is, the OBBBA provision limiting account contributions to U.S. citizens would supersede and override PRWORA.

Finally, regarding the Saver’s Match, which is effective for tax years beginning in 2027, the Treasury Department and IRS intend to promulgate proposed regulations regarding the Saver’s Match separately.

These proposed regulations would provide that PRWORA is applicable to the refunded portion of the affected refundable tax credits. Specifically, proposed §§1.23-2(a), 1.24-3(a), 1.25A-7(a), and 1.32-4(a) each would provide that, pursuant to PRWORA, aliens who are not qualified aliens are not eligible to receive the Federal public benefit of the refunded portion of the affected refundable tax credits under sections 23, 24, 25A and 32, respectively.

Proposed §1.32-4(b) would set forth definitions of the operative PRWORA terms that apply for purposes of applying proposed §1.32-4(a). For example, proposed §1.32-4(b)(1) would provide that for purposes of applying PRWORA to the refunded portion of the EITC, the term “alien” has the same definition as in section 101(a) of the Immigration and Nationality Act, Pub. L. No. 82-414, 66 Stat. 163, 8 U.S.C. 1101(a)(3). Proposed §1.32-4(b)(4) would provide that the term “qualified alien” has the same definition as in section 431(b) of PRWORA (8 U.S.C. 1641(b)). Finally, consistent with the OLC conclusion that the refunded portions of the affected refundable tax credits (that is, the portion that exceeds the individual’s tax liability and generates an overpayment under 26 U.S.C. 6401(b)(1)) are Federal public benefits within the meaning of 8 U.S.C. 1611(c), proposed §1.32-4(b)(2) would adopt this same definition of a Federal public benefit for purposes of applying proposed §1.32-4(a). Sections 1.23-2(b), 1.24-3(b), and 1.25A-7(b), would adopt all of the PRWORA operative definitions applicable to the affected refundable tax credits by cross reference to §1.32-4(b).

The proposed regulations would provide that only the refunded portion of an affected refundable tax credit is a Federal public benefit. Accordingly, if the taxpayer is eligible for the affected refundable tax credit under the Code, the proposed regulations would bar receipt only of the portion of the sum of those affected refundable tax credits that exceeds the income tax liability imposed by subtitle A (reduced by credits allowable under subparts A, B, D, and G of part IV of subchapter A of chapter 1).²⁴ Although the proposed definition of a Federal public benefit is similar to what is considered to be an overpayment in section 6401(b)(1), it is not the same because it is limited to affected refundable tax credits. If the taxpayer is not a U.S. citizen, U.S. national, or qualified alien, the amount considered to be the overpayment under section 6401(b) that is available for credit, offset, or refund, which may include other refundable tax credits that are not affected refundable tax credits, would be reduced by the amount of the Federal public benefit.

Proposed §§ 1.23-2(d), 1.24-3(d), 1.25A-7(d), and 1.32-4(d) would clarify who can receive the refunded portion of the affected refundable tax credit under PRWORA by providing that unless a taxpayer is a U.S. citizen, U.S national, or qualified alien, the taxpayer is not eligible to receive a refund, credit, or offset of the refunded portion of the affected refundable tax credit.

As explained in the Background section of this preamble, to be a qualified alien, an individual must fall within one of the defined categories in 8 U.S.C. 1641(b) “at the time the alien applies for, receives, or attempts to receive a Federal public benefit.” The proposed regulations would provide that an alien must be a qualified alien, for purposes of receiving the refunded portion of the affected refundable tax credits, on the date the alien files a Federal income tax return first claiming the affected refundable tax credit. This rule would apply to the Federal income tax return first claiming the affected refundable tax credit, which may be, for example, an early return, amended return, or late return. Using the filing date the taxpayer first claimed the credit would best align Code and tax administration concepts with PRWORA’s requirement that an alien be a qualified alien at the time the alien applies for, attempts to receive, or receives the Federal public benefit. In addition, under the Code, a taxpayer either claims or does not claim a credit, and portions of a single credit cannot be claimed at different times. Consequently, the date on which the taxpayer first claims the credit is the most appropriate date for determining whether the taxpayer satisfies PRWORA’s qualified alien requirement for the Federal public benefit. Accordingly, sections 1.23-2(e), 1.24-3(e), 1.25A-7(e), and 1.32-4(e) of the proposed regulations would provide that each taxpayer claiming one or more of the affected refundable tax credits must be a U.S. citizen, U.S. national, or qualified alien on the date of filing an initial or amended Federal income tax return first claiming the credit for the taxable year in order to be eligible to receive the refunded portion of the tax credit. Proposed §§ 1.23-2(f), 1.24-3(f), 1.25A-7(f), and 1.32-4(f) would provide examples illustrating the applicability of the timing rule to the claim of the refunded portion of an affected refundable tax credit.

The EITC, AOTC, and the adoption tax credit generally require married individuals to file a joint return to claim the credit. The CTC does not require spouses to file a joint return, but spouses may elect to file a joint return. If married individuals filing a joint return meet the Code’s eligibility requirements of the specific refundable tax credit being claimed, and the amount of the affected refundable tax credit(s) exceeds the joint filers’ tax liability, then the proposed regulations would require that one of the joint filers be a U.S. citizen, U.S. national, or qualified alien to receive the joint refund, credit, or offset of the refunded portion of any of the affected refundable tax credits. See proposed §§ 1.23-2(b), 1.24-3(b), 1.25A-7(b), and 1.32-4(b)(4).

Under the proposed regulations, each individual (or one spouse in the case of a joint return) claiming an affected refundable tax credit that results in a Federal public benefit would be required to provide a declaration under penalty of perjury stating that the individual is a U.S. citizen, U.S. national, or qualified alien who is eligible to receive the claimed refund under PRWORA. This declaration or attestation would need to be made on the appropriate Federal income tax return, amended tax return, or schedule as required by the IRS. The IRS intends to update forms and instructions to reflect this requirement. Under section 6061(a) of the Code, all returns and refund claims must “be signed in accordance with forms or regulations prescribed by the Secretary.” See also § 1.6061-1(a). These documents must also be “verified by a written declaration that [they are] made under the penalties of perjury.” Section 6065 of the Code; see also §§ 1.6065-1(a), 301.6065-1, § 301.6402-2(b)(1). An individual who fails to provide the required declaration in the manner and on the form or schedule required by the IRS would not be eligible to receive the refunded portion of any of the affected refundable tax credits claimed on the return for the taxable year.

Section 7206 of the Code provides that willfully providing incorrect or untrue information on a tax return constitutes a felony. Penalties for violations of section 7206 include liability for a fine up to $100,000 and being sentenced to up to 3 years in prison. See also section 7207 of the Code. Additionally, 18 U.S.C. 1015(e) punishes as a felony any knowing false statement that one is a citizen or a national of the United States with the intent to obtain any Federal or State benefit or service. Finally, with respect to Federal public benefits, 18 U.S.C. 1001 provides that it is a felony to knowingly and willfully make any materially false, fictitious, or fraudulent statement or representation in any matter within the jurisdiction of any branch of the Federal Government.

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The proposed regulations have been designated by the Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is a significant regulatory action and subject to review under Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB. The proposed rulemaking is not expected to be considered a regulatory action under Executive Order 14192 because it does not impose any more than de minimis regulatory costs.

A. Need for Regulation

Tax credits provide a dollar-for-dollar reduction in tax liability. When a tax credit is refundable, any portion of the credit that exceeds the taxpayer’s liability may be refunded to the taxpayer. Because tax credits are typically designed to advance specific policy objectives, refundability ensures that low- and moderate-income taxpayers with little or no income tax liability can still benefit, thereby supporting the intended purpose of the credit. Some individual refundable income tax credits have similar eligibility requirements, but the specific rules generally differ across credits. For example, the EITC is intended to encourage work and requires taxpayers to have earned income; the CTC, designed to support families, conditions eligibility on the presence of qualifying children; and the AOTC is aimed at reducing the cost of higher education and requires enrollment of an eligible student in an eligible institution and payments of qualified expenses.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) defines the term “Federal public benefit” as “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.” Under PRWORA, other than in limited exceptions, aliens who are not qualified aliens are not eligible for any Federal public benefits. The Treasury Department and the IRS have not previously considered individual refundable income tax credits to constitute Federal public benefits under PRWORA.

In 2020, in response to the Treasury’s request for an opinion, the Office of Legal Counsel (OLC) at the Department of Justice opined (2020 Opinion) that the refunded portions of the EITC, CTC, and AOTC satisfies PRWORA’s definition of a Federal public benefit. Subsequently in November 2025, in response to the Treasury’s second request for an opinion, the OLC concluded in an opinion (2025 Opinion) that its 2020 Opinion reflects the best reading of the law and that the refunded portions of certain individual refundable income tax credits are within the meaning of Federal public benefits under PRWORA.

The proposed regulations would clarify how the term “Federal public benefit” as used in PRWORA applies to certain individual refundable income tax credits administered under the Code.

B. The Statute and the Proposed Regulations

The proposed regulations would apply PRWORA to the following four individual refundable income tax credits—the adoption tax credit, the CTC, the AOTC, and the EITC.

Section 23 of the Code allows eligible taxpayers to claim the adoption tax credit to offset the costs of adopting a child. Beginning in tax year 2025, up to $5,000 of the credit is refundable. To claim the credit, taxpayers must include on the return the Taxpayer Identification Number (TIN) of the adopted child. Married individuals must file a joint return to claim the credit unless exceptions apply.

Section 24 allows eligible taxpayers to claim the CTC of up to $2,200 for tax year 2025 (adjusted for inflation thereafter) for each qualifying child. The refundable portion of the CTC is referred to as the additional child tax credit (ACTC), which is calculated as 15 percent of the taxpayer’s earned income in excess of $2,500, up to $1,700 per qualifying child for tax year 2025 (adjusted for inflation thereafter). To be eligible, the qualifying child and the taxpayer (or the taxpayer’s spouse if filing jointly) must have work eligible SSNs issued before the due date of the tax return. For married individuals filing a joint return, if only one spouse meets the work eligible SSN requirements, the other spouse must have an SSN or Individual Taxpayer Identification number (ITIN) issued on or before the due date of the return. Married individuals who file separate returns are eligible to claim the CTC, but the credit begins to phase out at a lower income level than for those filing jointly.

Section 25A(a)(1) allows taxpayers to claim the AOTC for qualified education expenses paid for an eligible student for the first four years of postsecondary education. The maximum annual credit is $2,500 per student, and 40 percent of the credit amount is refundable. To be eligible, the taxpayer (or the taxpayer’s spouse if filing jointly) and the student (if not the taxpayer or spouse) must have work eligible SSNs issued before the due date of the tax return. Married individuals must file a joint return to claim the credit unless exceptions apply.

Section 32 allows taxpayers with earned income to claim the EITC, which is fully refundable. The maximum EITC amount varies with the number of qualifying children the taxpayer has. For tax year 2025, the maximum credit amount is $649 for taxpayers with no qualifying child, $4,328 for taxpayers with one qualifying child, $7,152 for taxpayers with two qualifying children, and $8,046 for taxpayers with three or more qualifying children. To be eligible, the taxpayer (both spouses if filing jointly) as well as the qualifying child must have valid SSNs issued on or before the filing due date of the tax return. For the EITC, an SSN is not valid if it is issued solely to allow an individual to receive or apply for a Federal funded benefit. Married individuals must file a joint return to receive the credit unless exceptions apply.

Under sections 6401 and 6402 of the Code, when the amount of a refundable tax credit (under subpart C of part IV of subchapter A of chapter 1) exceeds the tax imposed by subtitle A (reduced by nonrefundable tax credits), the amount of that excess is treated as an overpayment of tax and may be refunded to the taxpayer. Specifically, under section 6402, the IRS may credit the overpayment against any Federal tax liabilities of the taxpayer and shall, subject to certain mandatory offsets, refund any balance to the taxpayer.

Under section 401(a) of PRWORA (8 U.S.C. 1611(a)), aliens who are not qualified aliens as defined in 8 U.S.C. 1641 are not eligible for any Federal public benefit as defined in PRWORA, with certain narrow exceptions. Section 431(b) of PRWORA (8 U.S.C. 1641(b)) defines a qualified alien as an alien who, at the time the alien applies for, receives, or attempts to receive a Federal public benefit, meets certain alien status requirements, including “(1) an alien who is lawfully admitted for permanent residence under the Immigration and Nationality Act, (2) an alien who is granted asylum under section 208 of such Act, (3) a refugee who is admitted to the United States under section 207 of such Act, (4) an alien who is paroled into the United States under section 212(d)(5) of such Act for a period of at least 1 year, (5) an alien whose deportation is being withheld under section 243(h) of such Act (as in effect immediately before the effective date of section 307 of division C of Public Law 104-208) or section 241(b)(3) of such Act (as amended by section 305(a) of division C of Public Law 104-208), (6) an alien who is granted conditional entry pursuant to section 203(a)(7) of such Act as in effect prior to April 1, 1980, (7) an alien who is a Cuban and Haitian entrant (as defined in section 501(e) of the Refugee Education Assistance Act of 1980), or (8) an individual who lawfully resides in the United States in accordance with a Compact of Free Association referred to in section 1612(b)(2)(G) of [title 8].” Qualified aliens also include aliens who have been battered or subject to extreme cruelty in the United States and meet certain requirements.

These proposed regulations would clarify that the eligibility restrictions under PRWORA mentioned above would apply to the refunded portion of the following four refundable tax credits—the adoption tax credit, the CTC, the AOTC, and the EITC. Furthermore, these proposed regulations would provide that only the refunded portion of an affected refundable tax credit is a Federal public benefit. Accordingly, if the taxpayer is eligible for the affected refundable tax credit under the Code, these proposed regulations would bar receipt only of the portion of the sum of those affected refundable tax credits that exceeds the income tax liability imposed by subtitle A (reduced by credits allowable under subparts A, B, D, and G of part IV of subchapter A of chapter 1). If the taxpayer is not a U.S. citizen, U.S. national, or qualified alien, the amount considered to be the overpayment under section 6401(b) that is available for credit, offset, or refund, which may include other refundable tax credits would be reduced by the amount of the Federal public benefit. The proposed regulations would also establish the timing, in accordance with PRWORA, for determining the taxpayer’s eligibility for Federal public benefits administered under the Code. Finally, the proposed regulations would clarify the application to joint returns with only one spouse meeting the status requirements under PRWORA.

C. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations.

D. Affected Taxpayers

The Department of the Treasury and the IRS estimate that, for tax year 2026, 49 million Federal individual income tax returns (i.e., taxpayers) will claim at least one of the four affected refundable tax credits—the adoption tax credit, the CTC, the AOTC, and the EITC. Of these taxpayers, an estimated 24 million will claim an affected refundable tax credit that results in a Federal public benefit. The Department of the Treasury and the IRS do not have data on a taxpayer’s qualified alien status with respect to PRWORA to precisely estimate the number of affected taxpayers. There is no direct data to estimate the number of non-qualified aliens whose claims for the affected refundable tax credits would be disallowed under the proposed regulation. A rough estimate based on data from the Social Security Administration shared with the IRS for tax administration, United States Citizenship and Immigration Services statistics,²⁵ and historical Department of Homeland Security estimates of non-immigrants residing in the U.S.²⁶ suggests that, of the 24 million taxpayers claiming the Federal public benefit, a range of 200,000 to 700,000 taxpayers (0.8 to 2.8 percent) would likely be ineligible to receive it for tax year 2026 because they do not meet the qualified alien status requirements under PRWORA. These estimated numbers of affected taxpayers assume static behavior and do not account for potential behavioral responses to the proposed rulemaking, once finalized, that would affect whether a taxpayer claims an affected refundable tax credit or whether the claim contains a refunded portion.

E. Economic Effects of the Proposed Regulations

These proposed regulations would implement PRWORA’s requirements for Federal public benefits administered under the Code while minimizing taxpayer burden and other economic effects. In general, the proposed regulations, which would clarify the process for implementing PRWORA to the refunded portions of the affected refundable tax credits, are expected to have limited economic effects. Under the Code, taxpayers are generally required to have a valid SSN to be eligible for these credits. For tax year 2026, approximately only 200 thousand to 700 thousand taxpayers are estimated to be ineligible to receive the refund of the overpayment, have it credited against Federal tax liabilities, or use it to offset non-tax liabilities, due to the proposed regulations. The Department of the Treasury and the IRS do not have data on a taxpayer’s qualified alien status with respect to PRWORA to precisely estimate the dollar amount that would be disallowed under the proposed regulations. The estimated average amount of Federal public benefits for all taxpayers whose claims include the refunded portion of at least one affected refundable tax credit is $3,656 in 2026. Applying this average Federal public benefit for all taxpayers to the estimated range of affected taxpayers translates into an estimate of $0.7 billion to $2.6 billion of disallowed credits. In addition, these taxpayers would still be eligible to receive the nonrefunded portion of the credits if they meet eligibility requirements for the credits. Given the limited scope, any potential behavioral responses by affected taxpayers to the proposed regulations, such as changes to the extensive or intensive margin of labor supply decisions, would not be expected to have a significant impact on the economy.

1. Identifying Claims of a Federal Public Benefit

Under the proposed regulations, taxpayers who claim any of the four affected refundable tax credits would need to identify whether their claim for the credits includes a Federal public benefit, which these proposed regulations would limit to the refunded portion of the credits. Tax software, if used by the taxpayer, is expected to automatically generate this amount based on information provided by taxpayers during the return preparation process. This would reduce the compliance burden for taxpayers using software to complete their tax returns. The Department of the Treasury and the IRS estimate that more than 96 percent of the Federal individual income tax returns use assistance from consumer or professional tax software.

2. Self-Certification of Eligibility for a Federal Public Benefit

As previously explained in the preamble, taxpayers claiming an affected refundable tax credit that results in a Federal public benefit would be required to provide a declaration or attestation, under the penalty of perjury, stating if they are U.S. citizens, U.S. nationals, or qualified aliens under PRWORA who are eligible for the Federal public benefit claimed. Taxpayers would provide a written declaration on the Federal income tax return or on a schedule attached to the return, as prescribed by the IRS, stating their status eligibility for the Federal public benefit claimed. To minimize compliance burden, taxpayers would not be required to provide a separate document attesting eligibility under PRWORA.

3. Alternatives Considered

a. Individuals required to self-certify eligibility status before identifying the receipt of a Federal public benefit

An alternative to the aforementioned self-certification process is first to require every individual who claims any of the four affected refundable tax credits to self-certify eligibility status and then require aliens who are not qualified aliens for Federal public benefits under PRWORA to calculate the amount of the overpayment they would not be eligible for.

Relative to the self-certification process, this alternative would subject fewer taxpayers to the identification of overpayments but would require more individuals, including those whose claim for the affected refundable tax credits does not have a refunded portion, to self-certify whether they are U.S. citizens, U.S. nationals, or qualified aliens under PRWORA. To restrict the attestation of eligibility status only to those who are required to self-certify under PRWORA, i.e., those who claim a Federal public benefit, the self-certification process would require that taxpayers claiming any of the affected refundable tax credits first identify the refunded portion of their claim and then only those whose claim has a refunded portion would self-certify eligibility status. Given the wide prevalence of the use of consumer or professional tax software in return preparation, the cost for this calculation of the refunded portion is expected to be insignificant for most taxpayers.

b. Joint returns with one spouse meeting the PRWORA requirements

For married individuals filing a joint return, under these proposed regulations, one spouse would be required to be a U.S. citizen, U.S. national, or qualified alien under PRWORA for the married individuals to receive the full refunded portion of the affected refundable tax credits, have it credited against the couple’s Federal tax liabilities, or use it to offset the couple’s non-tax liabilities. An alternative approach would require married individuals with one spouse who is not a qualified alien to prorate the applicable credit or credits based on IRS-prescribed allocation rules that would account for each spouse’s eligibility status and a range of considerations specific to each credit. For example, allocations for the EITC could be based on which spouse had earned income whereas allocations for the other credits could be based on the share of qualified expenses contributed by, or other factors attributable to, each spouse. This alternative is complex because it would subject joint filers claiming the affected refundable tax credits to new credit allocation rules and additional tax computations that would not have been required otherwise. In addition, depending on the credit and the allocation rules, the IRS may lack the necessary third-party information reports to verify the spouse’s contributed expenses, income, or other factors used to determine the credit amount for which the qualified alien spouse is eligible. To reduce taxpayer burden and potential return errors, the proposed regulations provide that, for married individuals filing a joint return, if one spouse is a U.S. citizen, a U.S. national, or a qualified alien, then the other spouse would be treated as a qualified alien.

F. Summary

Based on the available data and analysis, the Treasury Department and the IRS estimate that the economic costs and benefits of the proposed regulations will be small. The Treasury Department and the IRS invite public comments on potential alternatives and additional data related to the economic effects that will result from these proposed regulations.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether that collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB.

The collections of information in these proposed regulations contain reporting and recordkeeping requirements that are necessary to ensure that individual refundable income tax credits are not received by aliens who are not qualified aliens pursuant to PRWORA. The collections will be used by the individual taxpayers claiming one or more of the affected refundable income tax credits to certify their legal status. The IRS will use the information for tax compliance purposes.

The proposed regulations include reporting requirements for taxpayers to self-certify under penalty of perjury that they are a U.S. citizen, U.S. national, or qualified alien who is eligible to receive the claimed refund as described in proposed §§1.23-1, 1.23-2, 1.24-2, 1.24-3, 1.25A-6, 1.25A-7, 1.32-1 and 1.32-4. Taxpayers will be able to complete this certification by completing Schedule 3-A, or other form as determined by the Treasury Secretary. Schedule 3-A, or its successor form, will be filed along with their 1040 tax return.

The likely respondents are individuals who file a Form 1040. For purposes of the PRA, the reporting requirements and associated burden will be included in the Paperwork Reduction Act Submissions associated with Form 1040 (OMB control number 1545-0074) and approved by the OMB in accordance with the PRA procedures under 5 CFR 1320.10.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. These recordkeeping requirements are considered general tax records under §1.6001-1(e) and are already approved by the OMB under 1545-0074. This proposed regulation is not creating or changing the general recordkeeping requirements under §1.6001-1(e).

The Secretary of the Treasury hereby certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). The proposed rules would not impose any requirement or obligation upon small entities. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

Pursuant to section 7805(f) of the Code, the proposed regulations will be submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on their impact on small business.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations would not have federalism implications and would not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.