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Mail Bag #1: Visiting US for Work / Adoption Credit / PFIC Filing / $1000 Child Tax Credit with FEIE

Mail Bag #1: Visiting US for Work / Adoption Credit / PFIC Filing / $1000 Child Tax Credit with FEIE
Ines Zemelman, EA
20-Jun-17

We get a lot of tax questions by email. They are often too short to warrant publishing a standalone article -  we realized that it would be a good idea to collect some of the most interesting questions and post them on our site.

This is the first installment of this piece that we will endeavour to publish weekly. Enjoy!

1. I live in the UK but visit the U.S. for work - does this affect my tax position?       - Andre, United Kingdom

Yes, very much so.

Even if you qualify for the Foreign Earned Income Exclusion, if you visit the U.S for work, this is considered U.S. Sourced Income - and is not eligible for exclusion. 

This often catches many taxpayers by surprise. As an example - if you visit the U.S for 5 days to give a speech at a conference representing your company, where 3 of those days were for the conference and two for vacation, 3 days worth of income would be considered U.S sourced and not eligible for exclusion.  If you gave that same speech via SKYPE from abroad, that would not be U.S sourced income.

Now - let’s say you visited the US for a fellowship programme. If you work for a university or something of the sort and these visits for the program are work, then it is work income. If you are, say, a basketball player, and go to the US to do fellowship courses in anthropology, that is not work but you are there on your own intellectual pursuits.

I live in the UK but visit the U.S. for work - does this affect my tax position?

2. Is it possible to claim an adoption credit and get a refund if we use the foreign earned income tax exclusion?       - Vivian, Chile

The 2016 adoption tax credit is NOT a refundable credit, which means taxpayers can only get the credit refunded if they have federal income tax liability. 

It works the same way as the Foreign Earned Income Exclusion. If you qualify for  the adoption credit - it will only be effective to the extent of your US tax liability for the year.

In simple terms - you can’t get a refund but you can reduce your tax liability.

Is it possible to claim an adoption credit and get a refund if we use the foreign earned income tax exclusion?

3. I find the cost of filing PFICs prohibitive. What options, other than giving up my US citizenship, do I have?     - Deidre, Canada

Indeed, filing requirements for PFICs (Form 8621) are certainly onerous. A far simpler exercise than renouncing your US citizenship would be to sell non-US mutual funds and purchase ETFs which pursue similar investment strategies.

We are not an investment advisor - but rather speaking simply from a US tax filing requirement perspective. Direct ownership in ETFs does not engender a Form 8621 filing requirement.

Please let us know if you need introduction to a financial advisor who works specifically with US expats.

I find the cost of filing PFICs prohibitive. What options, other than giving up my US citizenship, do I have?

4. Can I get a child tax credit ($1000) and get a refund if we use the foreign earned income tax exclusion?     - Joshua, Israel

As of Tax Year 2016 it is no longer possible to utilize the FEIE and still obtain the child credit.

In the past we have processed refundable child credit of $1,000 for each child for all expats with earnings under $100K. There existed a special approach that enabled the credit regardless of the Foreign Earned Income Exclusion. Although the IRS have not explicitly announced it, there is a high probability that amending prior years utilizing that trick will not work and credit will be disallowed. There are still certain ways to get the child credit, but it ultimately depends on particulars of your situation.                                                                   

You can utilize just the Foreign Tax Credit (FTC) and obtain the child credit. However, this is a multi-step decision. If you forego using Form 2555, you rescind the ability to use it for the next five years. This may make sense today, if your FTC covers your US tax liability, but if you project your earnings to increase to a level where the FTC alone will not cover your US tax liability (let's say you move from UK with high tax rates, to Hong Kong with low tax rates), you may be in a worse overall tax position even with the $1K credit per child. If you have not previously obtained the child credit but may be eligible (child under 17 with SSN), we can review your prior year return and let you know if it is possible for you to do so and if it makes sense to file an amendment for up to 3 years.

Can I get a child tax credit ($1000) and get a refund if we use the foreign earned income tax exclusion?

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats