Can US Expats Claim the Child Tax Credit and the Foreign Earned Income Exclusion?

Can US Expats Claim the Child Tax Credit and the Foreign Earned Income Exclusion?

All Americans are required to file a US tax return if they earn over $12,000 (in 2018), or just $400 of self-employment income, worldwide, even if they live abroad. This is because the US taxes based on citizenship rather than based on residence. Many expats are also required to report their foreign bank accounts, investments, and businesses.

Even though they still have to file, most expats don’t end up paying any US tax though, as they claim either the Foreign Tax Credit, or the Foreign Earned Income Exclusion, when they file.

Which of these IRS provisions each expat should claim depends on their circumstances, such as their income levels and types, which country they live in, and their residency status there.

For example, an expat with solely employment income who earns less than $100,000 and who pays foreign income tax at a lower rate than the US rate will often be better off claiming the Foreign Earned Income Exclusion. On the other hand, an expat who perhaps has multiple income types, earns over $100,000, or who pays a higher rate of foreign income tax than the US rate may be better off claiming the Foreign Tax Credit.

Expats who live abroad with American dependent children can claim the Child Tax Credit, just as if they were living in the US. Can expats claim both the Child Tax Credit and the Foreign Earned Income Exclusion though?

The New Child Tax Credit

The US Child Tax Credit changed as part of the Trump Tax Reform signed into law in December 2017.

“Just as in the United States, parents are eligible for the child tax credit. Be aware that similar rules apply: You must support your child, and he or she must live at home with you.” – CNBC

Previously, there were two separate child tax credits: the Child Tax Credit, and the Additional Child Tax Credit, with the Additional Tax Credit providing a refundable credit (i.e. a payment) for parents with no US tax liability.

In the Tax Reform though, the two were merged, and the credit was increased, so that expat parents who owe US tax can now claim a $2,000 tax credit per child, while those that don’t owe US tax may receive a refundable $1,400.

Expats can claim the Child Tax Credit by filing Form 8812. To qualify, they must meet the IRS criteria, including their children having US social security numbers.

Can US Expats Claim the Child Tax Credit and the Foreign Earned Income Exclusion?

When expats claim the Foreign Earned Income Exclusion, they are excluding their income from US taxation, rather than eliminating their tax bill, so if they earn under around $100,000 (the Foreign Earned Income Exclusion limit), claiming the Child Tax Credit is normally a wasted exercise, as it doesn’t allow them to claim the refundable Child Tax Credit. If they earn over around $100,000 on the other hand, claiming the Child Tax Credit may help them reduce their US tax bill.

Expats who claim the Foreign Tax Credit on the other hand often benefit from claiming the Child Tax Credit more.

This is because if they’ve already eliminated their US tax bill using the Foreign Tax Credit, claiming the Child Tax Credit enables them to claim a $1,400 refundable tax credit per child.

If in doubt, expats should seek guidance from a US expat tax specialist firm.

Catching up

Americans who are behind with their US tax filing can catch up without facing penalties using an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.

Expats who weren’t aware that they could claim the Child Tax Credit can also file amended returns to claim it for up to two previous years.

Register now, and your Bright!Tax CPA will be in touch right away to guide you through the next steps.

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