US Tax & Banking

Child Tax Credit and Expatriates

By Olga Kocybik (AIWC Düsseldorf)

If you are a US citizen or resident alien living outside the United States, even though you may not owe any US tax, you generally are required to file US income tax returns, estate tax returns, and gift tax returns. If you have an interest in, or signature or other authority over, non-US financial accounts whose aggregate value exceeded $10,000 at any time during the year, you generally must file an FBAR, regardless of whether you have to file other returns.

The Child Tax Credit (CTC) is up to $2,000 per child per year with $1,400 refundable portion. That being said, provided no tax is owed to the IRS, the parent(s) would be able to receive a payment of $1,400 per child. The new income thresholds are:

  • $200,000 for single, head of household, and married filing separately; and,
  • $400,000 for married filing jointly.

In addition, the refundable portion of the NEW credit cannot be greater than 15% of your earned income which exceeds $2,500. For example, if you earned $11,000, your refundable portion is limited to $1,275 ($11,000 less $2,500 times 15%). Other limitations and reductions of the credit exists but they are unlikely to apply to those living abroad.

Additional rules for expatriates

And as with everything else out there, there are some exceptions and special guidelines as to how the tax rules apply to expatriates:

  1. A taxpayer MUST have earned income in order to claim CTC. Those who currently use the Foreign Earned Income Exclusion and exclude all their income will not be eligible. A solution would be to revoke the Foreign Earned Income Exclusion election and start filing using the Foreign Tax Credit method instead. The change of methods should be analysed in detail as other factors may contribute to increasing your U.S. tax liability; and
  2. For those with foreign spouses, the definition of the “Support Test” requirement mentioned earlier extends to the child’s financial support provided by the other spouse. In essence, the filer of the U.S. tax return should be able to provide at least half of the financial support for the child in question.

What if you were eligible for the CTC all these years but have not filed your returns?

You may still make up for the lost opportunity. But keep in mind that the IRS has the three- and two-year statutes of limitations. If you have already filed but wish to change your return, such amended must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later. If NO return was filed, the statute of limitations is 2 years from the time the return was due including extensions. To illustrate, if you have not filed but was eligible to receive the CTC refund for 2016, you have until April 15, 2019 (2 years from the due date of the 2016 return or April 15, 2017) to file the 2016 return and obtain the CTC. 

In applying the provisions of this and any other tax article, it is important to understand the impact of applicable tax laws will vary between individual taxpayers.  

Please consult your tax adviser to determine how the tax laws discussed may affect your particular US tax situation. 

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