Refundable Child Tax Credit

Summary

The Refundable Child Tax Credit provides financial relief for U.S. expats with qualifying children by offering up to $2,000 per child, with $1,500 of that amount being potentially refundable. U.S. expats can claim this credit if their child is a U.S. citizen or national and meets the other qualifications. The credit is available even if you exclude foreign earned income under the Foreign Earned Income Exclusion, but you must meet income thresholds and file the necessary forms to claim it.

Description

The Refundable Child Tax Credit (CTC) for U.S. expats is a tax benefit designed to provide financial relief to taxpayers with dependent children under the age of 17. For U.S. expats, the Child Tax Credit operates similarly to how it does for residents, but with some important considerations based on your residency status and foreign income.

Here’s an overview of the Refundable Child Tax Credit for U.S. expats:

1. What is the Child Tax Credit?

The Child Tax Credit (CTC) is a tax benefit available to U.S. taxpayers with qualifying children. It reduces the amount of taxes you owe dollar-for-dollar. The credit can be partially or fully refundable, depending on your situation.

2. Refundable vs. Nonrefundable CTC

Refundable: If the credit exceeds the amount of tax you owe, you may receive a refund for the difference. This part of the credit is known as the Additional Child Tax Credit (ACTC).
Nonrefundable: If the credit is larger than your tax liability, the nonrefundable portion will only reduce your tax liability to zero, but you won't receive a refund.

3. Amount of the Credit

As of 2023, the Child Tax Credit provides up to $2,000 per qualifying child under the age of 17.
Of this, $1,500 may be refundable per child, depending on your income and filing status. This refundable amount is known as the Additional Child Tax Credit (ACTC).

4. Qualifying for the Credit as a U.S. Expat

To be eligible for the Child Tax Credit, the child must meet the following requirements:
1. Age: The child must be under 17 years old at the end of the year.
2. Relationship: The child must be your biological, adopted, or stepchild, or a foster child under certain conditions.
3. Citizenship: The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
4. Residency: The child must live with you for more than half the year.
5. Support: You must provide more than half of the child’s financial support during the year.
As a U.S. expat, the key factor in qualifying is that the child must be a U.S. citizen or a U.S. national and meet the other requirements.

5. Impact of Foreign Earned Income on the Child Tax Credit

If you’re a U.S. expat and qualify for the Foreign Earned Income Exclusion (FEIE), the Child Tax Credit is still available to you.
The Foreign Earned Income Exclusion allows you to exclude up to a certain amount of foreign income ($120,000 for 2023) from U.S. taxation, which may reduce your U.S. tax liability.
However, the Child Tax Credit can still be applied, even if your foreign income is excluded under the FEIE, as long as you meet the credit’s requirements.

6. Additional Child Tax Credit (ACTC) for U.S. Expats

The ACTC is the refundable portion of the Child Tax Credit. It is available if your earned income is above a certain threshold.
For U.S. expats, the refundable portion of the credit can be claimed if you have enough earned income, typically around $2,500 or more in qualifying earned income (such as wages, salaries, or self-employment income).
This means that even if you don’t owe taxes after applying the Foreign Earned Income Exclusion or other deductions, you may still be able to receive a refund for the refundable portion of the Child Tax Credit.

7. How to Claim the Credit

Form 1040: U.S. expats must file Form 1040 to claim the Child Tax Credit.
Form 8862: If you have been denied the Child Tax Credit in a previous year, you may need to file Form 8862 (Information to Claim Earned Income Credit After Disallowance) to prove eligibility.
Form 2555: If you’re claiming the Foreign Earned Income Exclusion (FEIE), you will also file Form 2555.

8. Claiming the Credit When Living Abroad

Even if you live abroad, the Child Tax Credit is available if you meet the requirements. Your U.S. tax filing status remains the same, and you report your worldwide income, including any foreign income, on your U.S. tax return.
The IRS will consider your expat status, income exclusions, and foreign tax credits, but the Child Tax Credit itself can still be claimed, provided you have qualifying children.

9. Income Phaseouts

The credit begins to phase out when your modified adjusted gross income (MAGI) exceeds certain thresholds:
- For single filers: The phaseout begins at $200,000.
- For married filing jointly: The phaseout begins at $400,000.
If your income exceeds these thresholds, the credit is reduced gradually, and you may not be eligible for the full amount.

10. Other Considerations for U.S. Expats

While the Child Tax Credit can provide significant financial relief, you should consider the following:
- Tax Treaties: Some countries have tax treaties with the U.S. that may impact your eligibility for the Foreign Tax Credit or affect your U.S. tax liability, potentially influencing your ability to claim the full Child Tax Credit.
- Dual Taxation: If you live in a country with high tax rates, you may still qualify for a Foreign Tax Credit to offset taxes you pay to the foreign government.
- Social Security Taxes: Expat children are generally not eligible for U.S. social security benefits based on the U.S. parent’s earnings, but this does not affect the Child Tax Credit itself.