The Child Tax Credit for US Expats
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Have you ever seen the T-shirts marketed to pregnant women with some version of “TAX CREDIT ON BOARD” across the chest and an arrow pointing down towards her belly? (For the record, I have never seen anyone actually wearing this shirt—although my mother insists that she was strongly considering buying one when she was pregnant with me. Go figure.) The Child Tax Credit (together with its cousin, the Additional Child Tax Credit) is one of the most popular provisions in the tax code, and for good reason. It’s a significant tax break, it’s available to a wide selection of taxpayers (including US expats) and it can result in actual extra cash in your pocket come tax time.
The Child Tax Credit for Taxpayers Outside the US
Let’s go through some of the misconceptions I’ve encountered about the Child Tax Credit from various US expat clients over the years, and what the reality is.
1) I don’t live in the United States, so I can’t claim the Child Tax Credit
Incorrect. You can claim the Child Tax Credit as a US expat, no matter where you live.
Many people confuse the Child Tax Credit with the Earned Income Tax Credit (EITC), a similar but separate credit which is aimed at low- to middle-income working families. The EITC is limited to taxpayers who live in the 50 states or DC for more than half of the year (sorry, Puerto Ricans, Samoans, Virgin Islanders, and Guamanians), so if you are planning on moving out of the US, waiting until July can have real financial benefits if you normally take the EITC on your return.
2) I don’t owe tax to the US anyway, so there is no point in claiming the Child Tax Credit
Nope. This is where the “Additional” Child Tax Credit (ACTC) comes in. If you don’t have any tax liability (say, after applying your Foreign Tax Credits) you can still claim the ACTC by filing Schedule 8812 and receive the amount of the Child Tax Credit in the form of a refund.
3) I make too much money to claim the Child Tax Credit
It depends. The Tax Cut and Jobs Act (TCJA), which took effect in 2018, vastly increased the eligibility of the Child Tax Credit. In 2017 and before, if you made more than $75,000 ($110,000 for married taxpayers filing jointly, $55,000 for married taxpayers filing separately or with nonresident alien spouses), you would see your Child Tax Credit begin to phase out. Nowadays, the credit doesn’t begin to phase out until you reach $200,000 ($400,000 for married filing jointly) in income.
4) I am going to get a massive refund because I file Form 2555 and take the Foreign Earned Income Exclusion so I will get the full ACTC for all of my kids
No, you won’t, and don’t even try. If you file Form 2555 to exclude your foreign wage or business income, you are barred from claiming the Additional Child Tax Credit. If you try to claim both the exclusion and the ACTC, you may be barred from taking the credit again in the future if the IRS finds you wrongly claimed the credit “due to reckless or intentional disregard of the rules” or fraud.
How to Qualify for the Child Tax Credit
To claim the Child Tax Credit or the ACTC, you have to satisfy two types of requirements:
You have to have a “Qualifying Child”, and
You have to be within the income limits
“Qualifying Child” for the Child Tax Credit
In order to be claimed for the Child Tax Credit, the child needs to meet the following requirements:
The child must be your son or daughter, stepson or stepdaughter, foster child, sibling, or stepsibling (or any of their descendants, such as your grandchild, niece, or nephew). Adopted children are the same as natural children as far as the IRS is concerned.
The child must be under age 17 as of the end of the year. That means they must still be 16 or younger. I repeat: SEVENTEEN-YEAR-OLDS ARE NOT ELIGIBLE. Emphasis added because this is probably the biggest disconnect between perception and reality for the Child Tax Credit—I have lost count of the number of parents of 17- and 18-year-olds who wonder what happened to their tax refunds. Don’t be those parents.
The child did not provide more than half of his or her own support during the year. This provision is rarely relevant for children living at home.
The child lived with you for more than half the year. Children who were born or died during the year count as having lived with you for the whole year.
The child is claimed as your dependent.
The child is not filing a joint return with someone else (i.e., a spouse).
Finally, and this is probably the most important item for US expats: The child must be a US citizen or Green Card holder with a valid Social Security number which was issued before the due date of the return. Therefore: if a US citizen child is born outside the US in December, submit your application for a Social Security number at the earliest opportunity, in order to make sure the number is issued before the tax return’s due date.
Children that do not meet all of the above requirements cannot be used to claim the Child Tax Credit, but they may be used to claim the non-refundable “Credit for Other Dependents” in tax years 2018 or later.
Income requirements for the Child Tax Credit
In order to claim the Child Tax Credit, the taxpayer must have earned income. Earned income is defined as wages, business or farm income, or nontaxable combat pay. Taxpayers with only passive income (rent, interest, dividends, or capital gains) cannot claim the Child Tax Credit.
The Additional Child Tax Credit (the one that gets refunded) phases in beginning at $2,500 of earned income. Therefore, if you file Schedule C as a self-employed individual, and your expenses are more than your income, you will not be able to claim the ACTC.
As discussed earlier, the Child Tax Credit begins to phase out at a certain income level, depending on your filing status and the tax year you are filing. To reiterate:
$200,000 for single taxpayers
$400,000 for Married Taxpayers Filing Jointly taxpayers
$200,000 for Married Filing Separately taxpayers
For every $1,000 in income (or portion thereof) above your phaseout level, your Child Tax Credit is reduced by $50. So, for tax year 2019, if a married couple made $425,000, their Child Tax Credit would be reduced by $1,250 (25 x $50).
Amount of the Child Tax Credit
OK, let’s get down to brass tacks: How much money is the IRS sending me this year? The answer, of course, is: It depends.
For tax years before 2017, the Child Tax Credit was $1,000 per child per year, and the entire amount was refundable. So, a family with three qualifying children ($3,000 of credit available) and a tax bill of $1,200 would have the entire tax bill wiped out and would receive the remaining $1,800 of the credit as a refund.
For 2018 and 2019, it’s a bit more complicated, but overall a better deal for taxpayers. Under the TJCA, the Child Tax Credit is now a whopping $2,000 per qualifying child, but “only” $1,400 is refundable as ACTC. Therefore, the same family with three children (a total of $6,000 in credit available) would have their entire $1,200 tax bill taken care of, but out of the remaining $4,800, they would only receive a refund of $4,200 ($1,400 x 3 children). Still a pretty good deal, if you ask me.
A certain competing firm used to use this slogan for this time of year: “It’s not tax season, it’s refund season!” While that’s not strictly true, many US expats with children (especially those who pay foreign taxes anyway) will find that the check they receive from the IRS more than makes up for the aggravation of having to file with the IRS in the first place.
Looking to claim your cute little tax credits? Contact us for a quote, and let us show you how CPAs For Expats may be able to put money in your pocket!