US Child Tax Credit

rdneu_56 · Post by **rdneu_56** » Tue Jan 31, 2006 8:51 am

Nelson wrote:

While we are being technical, there is GREAT advantage for anyone living outside US with US citizen children to file a 1040, and NOT use FEIE, thus making themselves eligible for the $1000 per child tax credit, which would be paid even if there is no tax liability.

A Cdn resident would use the foreign tax credits to reduce the tax to zero instead of FEIE. I would need to check byut this may require joint filing, but that would stil yield a refund instead of ZERO, which would be your result using FEIE.

Questions:

Is it not true that using foreign tax credits will result in some taxes being owed in any case?

Is it not also true that one cannot switch each and every year between FEIE and applying foreign tax credits? I used FEIE last year.

nelsona · Post by **nelsona** » Tue Jan 31, 2006 10:03 am

Is it not true that using foreign tax credits will result in some taxes being owed in any case?

Generally, when one has exclusively foreign income, even if taxed more than US rate, there would be perhaps 1% tax owing in US. However by filing this way, you would be entitled to the $1000 child tax credit per child . You do the math.

Is it not also true that one cannot switch each and every year between FEIE and applying foreign tax credits? I used FEIE last year.

Indeed, but you can switch once any time you wish. If you would have benefitted last year, then are you going to perpetuate that mistake every year?

rdneu_56 · Post by **rdneu_56** » Tue Jan 31, 2006 12:09 pm

OK Nelson - I see your point. I can always file an amended return for last year. However, I have a few days on business in the US every year - not much, but I have to account for that. In addition, doing all these tax credit calculations takes (me) a lot more time than the relatively simple FEIE method. My time is worth more than the difference, at least to me.

nelsona · Post by **nelsona** » Tue Jan 31, 2006 1:14 pm

I don't see why FEIE would be easier than FTC, espaecially since you should be using software.

First, FTC only applies to your WAGES, so any other income you have would already require you to file FTC. Even if you have no other income, doing one FTC (or one more than you are doing now) should be too much aof a hassle for $1000.

Second, FTC calcs will be getting simpler in the next few years, due to reduction in the number of categories. And FTC AMT (which is the reason you *might* have had US tax to pay) is being done away with. And either tax software poackage handles these quite nicely.

Like I said, I mention this to ALL US citizens living in Canada, because, like you, most don't know about this credit, or how it works. Heck, most americans in Canada don't realize they are required to file a 1040.

One warning about 'revoking' your choice from last year. It may NOT be as simple as ammending your return, and is subject to a fee for what IRS calls "private ruling' which, I would think, would be more than $1000.

rdneu_56 · Post by **rdneu_56** » Tue Jan 31, 2006 4:47 pm

If I remember correctly (I may not) FTC only applies to what is left after FEIE and deductions and exemptions. If there is nothing left it would yield no gain.
I agree with you that I should be using software to do the FTC, but this is yet another expense to consider.

nelsona · Post by **nelsona** » Tue Jan 31, 2006 4:55 pm

FTC applies to whatever you wish it to apply. FEIE applies only to foreign wages, and only to the first $80,000 of such. If you have interest, cap gains, dividends, UI, etc, you already have to use FTC for these amounts.

As to 'cost' of software, you just said "My time is worth more than the difference" of saving $1000. Software ($24) would fit your requirements perfectly, as I'm sure it would save you more than that in time.

If there is nothing left it would yield no gain.

You are missing the point: By filing using FTC, this allows you to have the additional child tax credit (and it is a REFUNDABLE TAX CREDIT), which filing with FEIE expressly forbids. If FEIE gets me no refund, but FTC gets you $920. or $1920, I'd invest the $24 and 1/2 hopur to get it.

The other nice thing about this credit, is that if you do owe no US tax, it isn't added to your Cdn income tax.

The US child tax credit is really a bonus for Yanks living in Canada -- if one files correctly.

rdneu_56 · Post by **rdneu_56** » Tue Jan 31, 2006 5:11 pm

Thank's Nelson

I'll get the software and figure it both ways. I have just one more question. Let's say my employment income is covered by the FEIE and I claim one personal exemption for $3,200 and I have interest income of only $500. Would the exemption not offset the interest and than some?

Thank's for the good pointers.

nelsona · Post by **nelsona** » Tue Jan 31, 2006 5:26 pm

When you remove your wages using FEIE, then you are left with everything else. If this is less than your standard deduction plus your exemptions (which should easily be $16,000 since you are 'head of household' and have at least one child) then you have no US tax to pay.

FEIE yields a ZERO tax return in most instances.

rdneu_56 · Post by **rdneu_56** » Tue Mar 07, 2006 8:57 am

Is it necessary to file a joint return, in order to claim the additional child tax credit, or can one claim it as either married filing separately or head of household?