What is Child Tax Credit and how to claim it on U.S. expat tax return?

Jun 4, 2019

As a U.S. expat parent, you can claim The Child Tax Credit available for individuals with a qualifying child. A tax credit is better and more valuable than a deduction. Are you wondering why? Because it creates a dollar-for-dollar reduction of your tax bill as a subtraction from actual taxes you owe. Another advantage of Child Tax Credit is a refund. It means you can get your money back and not just a subtraction of taxes owed. The story of CTC starts back in 1998 when it was introduced as a small non-refundable credit of 400 USD. Read further to learn what CTC is in 2019 and who can benefit from it. 

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What are the changes to the Child Tax Credit in 2018-2019?

Tax Cuts and Jobs act introduced a few important changes to the Child Tax Credit in 2018-2019. Generally speaking, Uncle Sam has been generous to taxpayers who have children and have U.S. tax filing obligation. Trump’s tax reform actually sort of merged Child Tax Credit and Additional Child Tax Credit. It also decreased the earned income threshold and even introduced new credit for other dependents. 

Now the maximum amount of CTC and credit for other dependents equals to $2000 USD for each child under age 17 for 2018-2025 tax years. For example, an eligible family have 2 qualifying children. They can reduce their tax liability up to $4000 USD. Starting with the tax year 2018, if the credit exceeds taxes owed, you can get up to $1400 USD of the refundable portion of the credit. It is equal to 15% of earned income above $2500 USD.

Child Tax Credit Fact #1: The earned income threshold to qualify for the Child Tax Credit is $2500 USD. Also, for 2018 the Child Tax Credit begins to phase out at an adjusted gross income of $200 000 USD for single filers or $400 000 USD joint filers.

There is a new $500 USD non-refundable credit available for each dependent, who isn’t a child. For example, one group include children ages 17-18 and college students ages 19-24. The college students should be in school full-time in at least 5 months of the year. Another good news, other dependents in this case also cover older adults! Included but not limited to a parent, grandparent, uncle or aunt, nephew or niece, or someone who lives with you all year long. That means if you provide half financial support for any of them, you may qualify for $500 USD non-refundable credit. The dependent shouldn’t have earned more than $4150 USD. 

Child Tax Credit eligibility and requirements

There are a few IRS tests that the child you claim as a dependent has to meet. They are 7 tests of age, relationship, citizenship, residence, support and dependence and SSN. Find below CTC eligibility and requirements:

  • Age: To qualify, a child must not have turned 17 by the last day of the tax year. He/She should be 16 or younger.
  • Relationship: A child you are claiming for the Child Tax Credit proposes must be related to you. They can be either your son, daughter, stepchild, foster child or an adopted child. An adopted child is always treated as your own child. It includes a child lawfully places with you for legal adoption. You can also claim brother, sister, stepbrother, stepsister or a descendant of any of these individuals, such as a grandchild, niece, or nephew. 
  • Citizenship: To meet a citizenship test, a child must be a U.S. citizen, U.S. national, or a U.S. resident alien. For tax purposes, the term “U.S. national” refers to individuals who were born in American Samoa or in the Commonwealth of the Northern Mariana Islands.
  • Support: A child didn’t provide more than half of their own support. They also cannot file a joint return that year.
  • Dependence: You will need to claim the child as a dependent on your U.S. expat tax return. 
  • Residence: A child must have lived with you for more than half of the tax year.

Child Tax Credit Fact #2: Taxpayer can’t claim a Child Tax Credit for a child, who doesn’t have a Social Security Number by the due date of the return including extensions. Children with ITIN can’t be claimed for either credit. Make sure your child doesn’t have “Not valid for employment” on his or her social security card.

Another interesting rule to remember about Child Tax Credit eligibility is that only one taxpayer (or married couple filing jointly) can claim the CTC. It doesn’t matter that the qualifying child spent time in more than one household during the tax year. Usually, the parent who has the primary custody of the child received the tax credit. In cases when parents have joint custody, they will need to reach an agreement on who will claim the credit.

Child Tax Credit Fact #3: The refundable and nonrefundable portion of the Child Tax Credit apply differently if you earn income outside the US. If you use the Foreign Earned Income Exclusion, you will not be able to claim the refundable portions of CTC while living abroad.

Child Tax Credit Fact #4: If you claim Foreign Tax Credit then Child Tax Credit may still lead to a refund. The refundable portion of the credit goes from $1000 USD to $1400 USD until the 2025 year. 

If you forgot to take the Child Tax Credit for previous years, then you can amend them. Your qualifying children must have had Social Security Numbers during those years. Also, bear in mind to apply the relevant tax laws for the years you are amending.

A few more Child-related Credits to save on your tax bill

There are a few other child-related tax savings, which are designed to help you save taxes on raising children. Those include Child and Dependent Care Credit and Adoption Tax Credit.

The first one allows you to deduct up to $3000 USD for one dependent, or up to $6000 USD if you have more than one. The Adoption Tax Credit is nonrefundable and it’s limited to your tax liability for the year. However, you can carry forward any credit in excess for up to 5 years.

To make things clear, you must have earned income, which includes wages and salaries for a job, self-employment income, if you want to qualify for the refundable credit. If you have investment income, then it is considered “unearned”. Unemployment benefits, worker’s compensation benefits or public assistance also belong to the latter group. Read here more about earned vs. Unearned income.

The changes take effect with the 2018 tax year and they will remain effective through the 2025 tax year. Don’t miss out on claiming Child Tax Credit as a US citizen living abroad. It can reduce your tax bill and get you a refund. Not so many Americans overseas take advantage of these credits simply because they are not aware of such. Or they have been using Foreign Earned Income Exclusion, which doesn’t allow you to claim the CTC. To make sure you qualify, you can pass this test on the IRS website, which helps you to determine if you qualify for the Child Tax Credit or the Credit for Other Dependents. 

Paying for childcare and dependent care can be quite expensive. Thus there is a tax credit to help reduce the costs. You can claim it in cases if you had to pay for someone to take care of your child, dependent or spouse so that you could work or go to school. Children must be 12 or younger at the end of the tax year, or dependent adult family members or spouses who were not able to care for themselves due to mental or physical illness. The largest possible credit is $1,050 with one dependent and $2,100 with multiple. The CDCTC is non-refundable.

Summary of Child Tax Credit for US citizens living abroad

As we all know the costs of childcare can be significant. However, if you know US tax laws, you can take advantage of available credits for dependents, including children and others. It helps to directly reduce the amount you owe to the IRS. If you as a US expat parent have a tax bill of $4000 USD and you are eligible for $1000 USD tax credit, then your bill will be reduced to $3000 USD. Another example, if you qualify for the Child Tax Credit and you owe below 0, then the IRS will send you the remaining amount of the credit, up to $1400 USD.

Remember, when you earn above the certain income threshold, then you are eligible for partial credit. For example, the amount you can claim is inverse proportion to how much you earn. So if your income increases, then the amount of credit to claim decreases. The phase-out begins at $200,000 USD for single filers and $400,000 for married filing jointly. 

Another interesting thing about Child Tax Credit is that all the changes will expire after December 31st, 2025. 

Contact us if you want to receive free 20-min consultation and discuss how to take advantage of available tax credits on your U.S. expat tax return.

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1. Foreign Tax Credit vs. Foreign Earned Income Exclusion

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