The Child Tax Credit for Americans Living Abroad – What US Expats Need to Know
Since the Tax Reform changes, American Expat parents can potentially take advantage of two US Child Tax Credits, depending on their circumstances: the new Child Tax Credit, and the Child and Dependent Care Credit. In this article we outline when and how they can be used, and what conditions need to be fulfilled to claim them.
The Child Tax Credit
The Child Tax Credit allows parents to deduct $2,000 from their US tax bill for each of their children. To qualify, the children must be 16 years old or younger at the end of the relevant tax year, they must be US citizens and they must have a US social security number or ITIN (Individual Taxpayer Identification Number).
So an expat with a US tax bill of $7,000 and three qualifying children could reduce their tax bill by $6,000 using the Child Tax Credit.
Since the Tax Reform, he Child Tax Credit is now refundable, meaning that if after you claim it your US tax liability becomes less than zero, a refund payment can now be claimed.
The refundable Child Tax Credit
The Child Tax Credit is now refundable , meaning that if after you claim when your US tax liability is less than zero,a refund payment is due.
Since the Child Tax Credit is non-refundable, it cannot reduce the tax you owe beyond $0. In other words, if your tax liability is $500 and you claim the Child Tax Credit, your liability will be reduced to $0 (meaning you can only take half of the credit). This is where the Additional Child Tax Credit comes into play.” – the IRS
However, expats who claim the Foreign Earned Income Exclusion can’t normally also claim the new Child Tax Credit, so expat parents paying taxes abroad and currently claiming (or thinking of claiming) the Foreign Earned Income Exclusion should consider whether they would be better off claiming the Foreign Tax Credit and the new Child Tax Credit instead.
Expat parents who claim the Foreign Tax Credit and successfully reduce their US tax liability to zero by claiming US tax credits against foreign taxes already paid can go on to claim the Child Tax Credit, which gives a refundable credit of $1,400 per child. This takes the form of a cash payment.
The Child and Dependent Care Credit
The Child and Dependent Care Credit allows parents who pay for child care to claim a tax credit of up to $600 per child (i.e. they can reduce their tax bill by this amount). Again it cannot be claimed as well as the Foreign Earned Income Exclusion, however it can be a useful addition to the Foreign Tax Credit and the Child Tax Credit.
There are several conditions worth noting though: the child care claimed for must have been for a child aged 12 or younger who is your dependent; it must have been provided so that one or both parents could work (or look for work); and it must have been paid for out of your earned income.
Catching up with your US expat taxes
Since FATCA, the IRS now has global reach, so we strongly recommend that expats who weren’t aware that they are required to file US taxes should consider the Streamlined Procedure, an IRS amnesty program that allows Americans living abroad to catch up on their US tax and FBAR filing without facing any penalties.