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IRS Stimulus Check #3 - $1,400 per adult and child  More info
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Child Tax Credit & Foreign Earned Income Exclusion

Child Tax Credit & Foreign Earned Income Exclusion
Ines Zemelman, EA
17 December 2020

Individuals who can claim a child as a dependent can use Child Tax Credit (CTC) as long as the child meets additional conditions. The CTC provides credit up to $2,000 per child under age of 17 at the end of the tax year with up to $1,400 of it being refundable. It also provides a non-refundable credit up to $500 per qualifying dependent who qualifies for the ODC (Credit for Other Dependents). 

Conditions a child should meet to qualify you for the CTC

  1. The child is your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them;
  2. The child is under age 17 at the end of the tax year;
  3. The child did not provide over half of his or her own support for the tax year;
  4. The child lived with you for more than half of the tax year ;
  5. You claimed the child as a dependent on your return;
  6. The child does not file a joint return for the year;
  7. The child is a U.S. citizen, U.S. national, or U.S. resident alien.

How does the Child Tax Credit work?

To claim a CTC your modified adjusted gross income (AGI) should not be over 400,000 for married filing jointly, and not be over $200,000 for other filing statuses. In case the credit is more than taxes owed, you can get up to $1,400 of the balance as a refund or ACTC. ACTC stands for additional child tax credit. 

How to claim Child Tax Credit?

To claim Child Tax Credit or Credit for Other Dependents, you should meet the following requirements:

  1. File Form 1040, Form 1040-SR, or Form 1040-NR and include the name and TIN of each dependent for whom you are claiming the CTC or ODC;
  2. File Form 8862 if applicable;
  3. Enter a timely issued TIN on your tax return if filing jointly;
  4. For each qualifying child for whom you are claiming the CTC enter the required SSN for the child;
  5. For each dependent for whom you are claiming the ODC, enter the timely issued TIN for the dependent.

The CTC and FEIE

If you have a child under the age of 17 with a social security number, you may be eligible to receive up to $1,400 per eligible child, even if you have made no tax payments. However, in order to do so, you cannot also take advantage of the Foreign Earned Income Exclusion (FEIE).

If you claimed the Foreign Earned Income Exclusion (FEIE) in the prior year, you must revoke the exclusion for a period of five years following the year of revocation to claim the Additional Child Tax Credit (ACTC).

How do you know to revoke or not to revoke FEIE?

For the five years:

  • You should live in a high-income tax country;
  • You should pay a high level of income tax to that foreign country;
  • You should have little income from the US;
  • You should work most of the time in the foreign country;
  • You must have earned income (passive income does not qualify for the ACTC);
  • Recommended that child(ren) remain under 17 for the five years.

Pros:

  • May benefit from receiving $1,400 per eligible child.

Cons:

  • Can't claim FEIE for the five succeeding tax years;
  • You have fewer choices to avoid tax because you can't claim FEIE;
  • Risky to revoke FEIE because it depends on unknowns like future income, tax, children, where you live, etc.;
  • May result in more tax due in future years than had you not revoked FEIE.

These are only some of the factors to consider.  If you are not comfortable with the risks, then do not revoke.  

Scenario analysis 

If you believe your income may change in future years, speak with your tax advisor to run a projection so that you can make an educated decision. The more information you have about possible income changes (admittedly, this is not possible for many people) - the better choice you can make.

Ines Zemelman, EA
Founder of TFX