Navigating the labyrinthine U.S. tax system is challenging enough for American taxpayers living stateside, let alone for those residing abroad. One often-overlooked benefit that can make a significant difference on your expat tax return is the Refundable Additional Child Tax Credit (ACTC). This article aims to provide a comprehensive understanding of this credit, its refundable nature, and why it’s particularly beneficial for U.S. expats.
What is the Additional Child Tax Credit (ACTC)?
The ACTC is a tax credit designed to offer financial relief to families with children. Unlike the standard, nonrefundable Child Tax Credit, which requires the taxpayer to have lived in the U.S. for at least six months during the tax year, the ACTC has no such residency requirement. This makes it an invaluable asset for U.S. expats who may not meet the criteria for the standard Child Tax Credit but still have obligations for income taxes to the U.S. government.
For 2023, the refundable portion of this credit is worth up to $1,600 per qualifying child. The beauty of a refundable tax credit like the ACTC is that it not only reduces your tax liability to zero but can also result in a tax refund for the unused portion.
Refundable vs. Non-Refundable Credits
Tax credits come in two flavors: refundable and non-refundable. A nonrefundable credit, like the standard Child Tax Credit, can reduce your tax liability but won’t result in a tax refund if the credit amount exceeds your tax liability. On the other hand, a refundable tax credit like the ACTC can not only reduce your tax liability to zero but also result in a refund for the unused portion.
For example, if your federal tax return shows a tax liability of $1,000 and you qualify for a $1,400 ACTC, you would not only eliminate your tax liability but also receive a $400 refund from the IRS.
Eligibility and Filing Status
Eligible taxpayers can claim the ACTC regardless of their filing status. However, married couples filing a joint return may have an advantage as their income threshold for phase-out levels could be higher, allowing them to claim a larger credit.
Phase-Out and Income Thresholds
If your MAGI exceeds the aforementioned limits of $400,000 (married filing jointly) or $200,000 (all other filers), your Child Tax Credit begins to phase out. The credit is reduced by $50 for each $1,000 that your income exceeds the threshold. This phase-out also affects the maximum refund you can receive from the ACTC.
Who is a Qualifying Child?
To claim the ACTC, you must have a “qualifying child.” The criteria for a qualifying child are as follows:
- The child must be under 17 years old.
- The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
- The child must be related to you (son, daughter, stepchild, foster child, etc.).
- The child must have lived with you for more than half the tax year.
Exceptions for Adopted and Foster Children
Adopted children are considered your own children for the purpose of the ACTC. This includes a child lawfully placed with you for legal adoption, even if the adoption is not yet finalized. Similarly, a foster child placed with you by an authorized agency also qualifies as an eligible child.
Are there limitations on claiming the refundable additional child tax credit when you live abroad?
Yes, there are limitations on claiming the refundable Additional Child Tax Credit (ACTC) when you live abroad. The ability to claim the ACTC and the limitations associated with it are primarily based on income earned abroad and whether the foreign-earned income exclusion has been taken.
Here are some key points to consider:
- Foreign Earned Income Exclusion (FEIE): If you claim the FEIE under Form 2555 or Form 2555-EZ, the income excluded will not count toward the earned income needed to qualify for the ACTC. The credit requires earned income to become refundable, and by excluding a portion or all of your foreign earnings, you might reduce or eliminate the potential refundable portion of the ACTC.
- Earned Income: You must have earned income to qualify for the ACTC. If you exclude all your foreign earned income using the FEIE, and you don’t have other earned income, you won’t be eligible for the ACTC.
- Child’s Age and Residency: The child for whom the credit is claimed must be under 17 years of age at the end of the tax year, and they must live with you for more than half the year. There are special residency tests for children of U.S. military members stationed overseas, but generally, the child should reside with the taxpayer in the United States for over half the year to qualify for the ACTC.
- Child’s Taxpayer Identification Number: The child must have a valid Social Security Number (SSN) issued by the Social Security Administration that is valid for employment. An Individual Taxpayer Identification Number (ITIN) or Adoption Taxpayer Identification Number (ATIN) won’t qualify a child for the ACTC.
- Income Thresholds and Phaseouts: There are income thresholds and phaseout ranges for the ACTC. Depending on your modified adjusted gross income (which can be affected if you claim the FEIE), the ACTC could be reduced or phased out.
Don’t Miss the Boat
Regrettably, many U.S. expats are unaware of the ACTC and miss out on this valuable credit. This lack of awareness often results in a smaller tax refund or even unnecessary taxable income. If you meet the criteria, this credit can provide significant financial relief, especially when living abroad with the added expenses that can entail.
How to Receive Your Refund?
The IRS offers multiple ways to receive your ACTC refund:
- Direct deposit into a U.S. bank account
- Issued as a check
- Applied to the next tax year as a partial refund against your income taxes
The Refundable Additional Child Tax Credit is a valuable but often overlooked tax benefit for U.S. expats. It offers a lifeline to American taxpayers living abroad who may not meet the stringent requirements for the standard, nonrefundable Child Tax Credit. By understanding the nuances of this credit, from its income requirements to its refundable nature, you can maximize your tax refund and minimize your taxable income.
If you’re an expat filing your taxes, don’t overlook this credit. Consult with a tax professional familiar with expat taxes to ensure you’re taking full advantage of this and other tax benefits. After all, every dollar saved is a dollar earned, especially when it comes to expat taxes.
This comprehensive guide aims to serve as a valuable resource for U.S. expats. For more personalized advice, feel free to reach out to our team at 1040 Abroad. We’re committed to helping you navigate the complexities of U.S. taxes while living abroad.