U.S. Child Tax Credit
By Roger B. Adams, EA
The Child Tax Credit
This credit pays a benefit of $1,000 off your TAX for each kid under 17 years old if you make less than the phaseout amounts; GREAT!
To see if you can claim the credit it is very important to carefully read Pub. 972; https://www.irs.gov/pub/irs-pdf/p972.pdf
Unfortunately, if you have excluded all your earned income you probably owe no tax after deductions and exemptions and there will be nothing to credit. You lose $1,000 per child.
But there is a remarkable thing about this credit; sometimes, even if you owe no tax you can still get the $1,000 a child if you have taxable earned income. This is accomplished by using Form 8812, the Additional Child Tax Credit https://www.irs.gov/pub/irs-pdf/f8812.pdf
Example: Jack and Dianne live on Pleasure Island. This is an island country with a flat tax of 15% on all worldwide income.
Jack is a US citizen; Dianne is a housewife and a native Islander. They have 3 little kids all under 17.
Jack works for Island T.V. as host of the evening news making $80,000 annually.
Dianne elects to be treated as a US resident for tax purposes under §6013(g).
If Jack excludes his earned income using Form 2555EZ his US tax is $0; not bad, but he has $0 in earned income.
The problem is they just lost $3,000 in tax refunds, and the ability to contribute $8,000 to their IRA in America whose gains Pleasure Island exempts from taxable income.
If he and many like him, have no earned income and no tax due to the US after deductions and exclusions, Jack and Dianne cannot take advantage of the Child Tax Credit or contribute to an IRA because there is no earned income to credit.
By using the Foreign Tax Credit that problem is eliminated as illustrated:
- Jack and Dianne pay $12,000 to Pleasure Island in income tax.
- They determine that they have $51,600 in US taxable income
- US tax on that amount is $6,961 which they post on line 44 of 1040
- Using the FTC that tax liability is reduced to $0
- They do the Child Tax Credit Worksheet and discover to their dismay that the FTC eliminates their Child Tax Credit.
- However, they are directed to the “Additional Child Tax Credit” Form 8812.
- They fill that out and see to their delight that they may put $3,000 on line 68 of the 1040 as a “payment”.
- They get a $3,000 refund check six weeks later.
- They put $8,000 in their ROTH IRA because they have sufficient earned income.
- They hire a babysitter, go down to the beach for drinks, a grilled fish dinner, and stay up real late.
Using the Foreign Tax Credit assures that you have taxable earned income.
By the way, after reading this you discover that you have fallen victim to the Exclusion trap and have lost out on your Child Tax Credit refunds there is still hope. You can go back all the way to tax year 2005, refigure your tax using the FTC and Additional Child Tax Credit Form 8812 and then file a 1040X (amended return) to get the money you so richly deserve.
ContactAmerican Children Abroad
Ben and Helena Henderson
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