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.
What is the Additional Child Tax Credit (ACTC)?
The Additional Child Tax Credit (ACTC) is a refundable portion of the Child Tax Credit. The Child Tax Credit can offset up to $2,000 of your tax liability. However, since many U.S. expats usually don’t have any tax owing, the ACTC becomes invaluable. It allows eligible families to receive up to $1,600 per qualifying child as a refund, providing financial relief even when there is no tax liability to offset. This makes the ACTC particularly beneficial for lower-income families who may not owe enough in taxes to claim the full Child Tax Credit.
For 2023, the refundable portion of this credit is worth up to $1,600 per qualifying child. The remaining child tax credit allows taxpayers to receive a refund of up to $1,600 of the $2,000 Child Tax Credit per child for 2023. The beauty of a refundable tax credit like the additional child tax credit 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 Tax 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 credit like the additional child tax credit can not only reduce your tax liability to zero but also result in a refund for the unused portion.
For example, if your federal income tax return shows a tax liability of $1,000 and you qualify for a $1,600 ACTC, you would not only eliminate your tax liability but also receive a $600 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. To qualify for the ACTC, the taxpayer must have provided at least half of the child’s financial support during the last year.
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 current 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.
Can I Claim The Child Tax Credit If My Child Lives Abroad?
Yes, you can generally claim the refundable Additional Child Tax Credit (ACTC) for a child who lives abroad, provided the child meets all the qualifying criteria for the CTC. The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, your grandchild, niece, or nephew).
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.
- The child must have lived with you for more than half the tax year.
Exceptions for Adopted and Foster Children
Adopted children are considered qualifying 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 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.
- Age and Residency Requirements: To be eligible for the credit, the child must be under age 17 at the end of the tax year, ensuring they meet the definition of a qualifying child. Children over age 17 do not qualify for this credit. Additionally, the child must reside with the taxpayer for more than half of the year, with specific residency tests available for children of U.S. military members stationed overseas.
- 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.
- Dependent Status Test: 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.
What forms do I need to fill out to claim the Additional Child Tax Credit?
To claim the Additional Child Tax Credit (ACTC), you need to fill out the following forms:
- Form 1040: This is the standard individual income tax return form that you need to complete. This form will include your general tax information and calculate your overall tax liability.
- Schedule 8812 (Form 1040): This schedule is specifically used to calculate the Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC). It helps determine the amount of the refundable ACTC based on the unused portion of the CTC.
Steps to Claim the ACTC:
- Complete Form 1040:
- Fill out your personal information, income details, and calculate your tax liability.
- Complete Schedule 8812:
- Attach this schedule to your Form 1040.
- Provide details about your qualifying children.
- Calculate the amount of the Child Tax Credit and the Additional Child Tax Credit.
- Follow the instructions to determine the refundable portion of the ACTC.
- Submit Your Tax Return:
- Ensure that both Form 1040 and Schedule 8812 are completed and attached.
- Submit your tax return by the due date.
Where to Find the Forms:
- Form 1040: IRS Form 1040
- Schedule 8812: IRS Schedule 8812
Make sure to carefully read the instructions for each form to ensure all information is accurately filled out. If you need assistance, consider consulting a tax professional.
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. The ACTC can help reduce your tax bill, potentially resulting in a lower tax bill or even a refund.
How to Receive Your Refund?
The IRS offers multiple ways to receive your child tax credit 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 and offer free tax advice to all.
