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.
IRS online tool helps families see if they qualify for the Child Tax Credit; one of three tools now available for the upcoming advance payments
The Treasury Department and the Internal Revenue Service urge families to take advantage of a special online tool that can help them determine whether they qualify for the Child Tax Credit and the special monthly advance payments beginning on July 15.
Available exclusively on IRS.gov, the new Child Tax Credit Eligibility Assistant, launched earlier this week, is interactive and easy to use. By answering a series of questions about themselves and their family members, a parent or other family member can quickly determine whether they qualify for the credit.
Though anyone can use this tool, it may be particularly useful to families who don’t normally file a federal tax return and have not yet filed either a 2019 or 2020 tax return. Often, these are people who receive little or no income, including those experiencing homelessness, low income households, and other underserved groups. Using this tool can help them decide whether they should take the next step and register for the Child Tax Credit payments on another new IRS tool unveiled earlier this week.
Rev. Proc. 2021-23
Table of Contents
SECTION 1. PURPOSE
SECTION 2. CHANGES
SECTION 3. 2021 INCREASED REFUNDABLE CHILD TAX CREDIT
SECTION 4. 2021 EARNED INCOME CREDIT AS MODIFIED AND SURPERSEDED
SECTION 5. APPLICABLE PERCENTAGE TABLE FOR 2021 AS MODIFIED AND SUPERSEDED
SECTION 6. EFFECT ON OTHER DOCUMENTS
SECTION 7. EFFECTIVE DATE
SECTION 8. DRAFTING INFORMATION
SECTION 1. PURPOSE
The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.
Child tax credit (CTC)
- The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
- To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
- If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
- You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.
Child and dependent care credit (DCC)
The American Rescue Plan Act of 2021 (P.L. 117-2; H.R. 1319; 3/11/21) provides a variety of financial and other relief for COVID-19 problems. Most of the changes are only for 2021. At least two are for 2020 and mean that the IRS has to update forms and computer systems and get information out to taxpayers quickly including what to do if you already filed your return. These two changes for 2020:
- $10,200 of unemployment compensation receivd in 2020 is non-taxable if the taxpayer’s AGI is under $150,000 (if MFJ and both spouses received such comp, each get to exclude up to $10,200). [IRS guidance of 3/12/21]
- Not having to repay an advance Premium Tax Credit if the individual’s income turns out to be over 400% of the federal poverty line.
Some of the 2021 changes are not solely tied to the pandemic as these changes help low-income families by making the tax system more equitable and have been proposed by President Biden and others. One of these changes is making the $2,000/child tax credit fully refundable and increasing the credit.
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.
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.
You are eligible for the Child Tax Credit if you have a qualifying child/children and you have earned income, according to the IRS requirements, which are:
- Your child is aged 16 years or younger, as of December 31 of the tax year.
- Your child is a U.S. citizen, U.S. National or U.S. Resident Alien and has a social security number. There is an exception for an adopted child.
- You have $2,500 of earned income as an employee or from self-employment. This is down from $3,000 prior to the new Tax Cuts and Jobs Act (TCJA).
- The amount of the credit is tied to the amount of your earned income.
- The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies, depending on your filing status.
- For individual filers, the phase-out begins at $200,000 ($400,000 for joint filers).
Starting with tax year 2018, the Child Tax Credit will allow you to reduce your federal income tax by up to $2,000 for each qualifying child.
$1,400 of which is a refundable credit, expats who managed to bring their tax owing down to zero by using the foreign tax credit would therefore receive a refund of $1,400. This amount will be adjusted for inflation after 2018.
Your child must be your son, daughter, stepchild, foster child, sibling, stepsister/brother or a descendant of any of these individuals. A legally adopted child is treated as your own child. The child must not have provided more than half of their own support and you need to claim them as a dependent on your federal tax return. The qualifying child should have lived with you for more than half of the tax year, and there are some exceptions to the residence test.
Have a tax question? Contact Olivier Wagner.
On June 15, 2012, the U.S. Department of Homeland Security (DHS) announced that it would not deport certain undocumented youth who came to the United States as children. Under a directive from the DHS secretary, these youths may be granted a type of temporary permission to stay in the U.S. called “deferred action.” The Obama administration called this program Deferred Action for Childhood Arrivals, or DACA. This article is designed to provide guidance for tax professionals preparing and filing tax returns for DACA recipients.
American Expat parents can potentially take advantage of not just one but three U.S. Child Tax Credits, depending on their circumstances: the Child Tax Credit, the Additional Child Tax Credit, and the Child and Dependent Care Credit. In this article we outline when and how all three can be used, and what conditions need to be fulfilled to claim them. Read More
While the past year did not produce any monumental changes to U.S. tax law, there are a number of noteworthy changes that expats should keep in mind as we enter 2017. We also share a few highlights from President-elect Trump’s current tax plan.
Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.
Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates Read More
If you cannot claim the entire amount of your child tax credit because it exceeds your tax, don’t be discouraged, because you may be able to claim the unused portion as an additional child tax credit. The additional child tax credit is a refundable credit, and is available to you whenever you cannot claim the entire amount of the child tax credit.
The amount of the refund, however, may differ depending on your total earned income. It may also be affected by the amount of Social Security and Medicare taxes that were paid.
Figuring and Claiming the Credit:
The amount of the additional child tax credit that you can claim on your income tax is the lower of: Read More