If you’re an American living overseas, you could be eligible for the Child Tax Credit (CTC), a valuable tax benefit that can reduce your tax liability or even provide a refund. However, many expats miss out on this opportunity because they’re unaware of the eligibility requirements or how the credit interacts with foreign income rules. Here’s a guide to help you navigate the process and claim what you’re entitled to.
Who Qualifies for the Child Tax Credit?
To qualify for the CTC while living abroad, you’ll need to meet the following requirements:
- A Qualifying Child: The child must be under 17 years old at the end of the tax year. They must be a U.S. citizen, U.S. nationals, or U.S. residents and have lived with you for more than half the year.
- Income Limits: The credit starts phasing out if your modified adjusted gross income (MAGI) exceeds $400,000 for married couples filing jointly or $200,000 for single filers. For every $1,000 above these thresholds, the credit is reduced by $50.
The maximum benefit you can receive is $2,000 per qualifying child, with up to $1,600 refundable under the Additional Child Tax Credit (ACTC), even if you owe no taxes.
How the Foreign Earned Income Exclusion Affects Your Benefits
One crucial factor for expats to consider is the Foreign Earned Income Exclusion (FEIE). If you use Form 2555 to exclude foreign income from U.S. taxation, that excluded income does not count as earned income for the refundable portion of the CTC. In simpler terms, if you exclude all your foreign income, you might lose eligibility for the ACTC refund.
Instead, many expats opt to claim the Foreign Tax Credit (FTC) rather than the FEIE. The FTC allows you to offset U.S. taxes with foreign taxes paid without affecting your eligibility for the refundable portion of the Child Tax Credit. This strategy can result in a larger tax benefit.
How to Apply for the Child Tax Credit
Here’s a step-by-step guide on how to claim the CTC while living abroad:
- File Form 1040: This is the standard U.S. individual income tax return, which all U.S. citizens and residents are required to file regardless of where they live.
- Attach Schedule 8812: This form calculates both the Child Tax Credit and the Additional Child Tax Credit. You’ll need to provide details about your qualifying children and determine how much of the credit you’re eligible for.
- Submit Your Tax Return: Ensure that you file your tax return by the standard deadline (typically April 15 or June 15 for expats with an automatic extension).
Important Tips for Maximizing Your Child Tax Credit
Consider Using the Foreign Tax Credit: The FTC may be more beneficial than the FEIE if you want to maximize the refundable portion of the credit.
Maintain Proper Documentation: Be sure to keep records of your child’s citizenship, residency status, and income to support your claim in case of an audit.
Check Eligibility Each Year: Changes in your income or family situation could affect your eligibility for the CTC, so be sure to review the criteria annually.
Final Thoughts
If you’re an American living abroad, the Child Tax Credit could provide significant tax savings. By understanding the eligibility requirements and planning your tax strategy, you can reduce your U.S. tax liability and potentially receive a refund.
Don’t leave money on the table—check if you qualify for the CTC and file your taxes correctly to claim the benefits you deserve! For more detailed guidance, consult a tax professional or visit the IRS website for updates.
