Americans families residing in a foreign country can take advantage of some tax planning gems this season.
Just like those living stateside, citizens abroad need to file by April 18. They get an automatic extension to June 15, but any taxes due must be paid by the April date.
“The availability of the child tax credit is a surprise to many taxpayers who live abroad and have kids,” said Joshua Ashman, a certified public accountant at Expat Tax Professionals in New York. “Many people are surprised that they’re eligible for a refundable tax credit.”
Just as in the United States, parents are eligible for the child tax credit. Be aware that similar rules apply: You must support your child, and he or she must live at home with you.
The planning quirk for American parents abroad is that they have to make a choice.
They can opt for the child tax credit, which reduces tax liability dollar for dollar, as well as the additional child tax credit if the filer gets less than the full $1,000 per kid as part of the child tax credit.
Alternatively, taxpayers can take the foreign earned income exclusion, which permits expats to exclude some of the income they’ve earned abroad. For the 2016 tax year, you can exclude a maximum of $101,300.
You cannot have both the child tax credit and the foreign income exclusion because of recent legislation.
Whether it makes sense to take one or the other will depend on your circumstances and the tax regime of the nation in which you’re living.
Here’s a tax opportunity for American expats with kids in college: You can take the American opportunity tax credit even if your child is attending a foreign university. The maximum amount is $2,500 per eligible student.
Get an even bigger bang for your buck by tapping your 529 college savings plan to pay for your child’s education at a foreign university.
But be aware that your account may not enjoy the same tax-advantaged status as a 529 in the U.S., so be sure to understand your host country’s tax rules.
“People need to consider the impact of local taxation,” said Ephraim Moss, an attorney at Expat Tax Professionals. “A person living abroad needs to remember that the rules in that local country may trump the U.S. rules.”
If you reside in a country that treats 529’s differently compared to the U.S., you’re likely to see some kind of taxation when the time comes to withdraw money to pay for school, said Moss.
Just like you, your offspring have reporting obligations, including the requirement to fill out an annual report of foreign bank and financial accounts (FBAR) and Form 8938 to keep the U.S. Treasury and IRS posted on foreign bank accounts.
Your child must file an FBAR if he or she has financial interests in or signatory authority over foreign bank accounts and if the maximum value of those accounts in aggregate exceeds $10,000 during the calendar year.
“When the IRS receives information from the banks about U.S. account holders and cross-references it, it will lead to the automatic generation of penalties if the IRS finds that you haven’t reported your FBAR,” said Ashman.