Changes to the Child Tax Credit Will Benefit Many Expat Parents
While Trump’s tax reform made a number of important changes to the U.S. tax system, there is one reform that is particularly important for U.S. parents living abroad. The Tax Cuts and Jobs Act, signed into law by President Trump at the end of 2017, significantly modifies the child tax credit rules, mostly to the benefit of U.S. parents.
In this blog, we compare the pre-reform rules to the post-reform rules, so expat parents can best understand how the new rules will affect them.
How did the child tax credit work before the reform?
Prior to the tax reform, the tax credit worked as follows: Taxpayer parents could claim a child tax credit (CTC) of up to $1,000 for each qualifying child under the age of 17. The credit lowers one’s taxes dollar for dollar.
The child tax credit was reduced by 5 percent of adjusted gross income over $75,000 for single parents and $110,000 for married taxpayers filing jointly. Generally, if the credit exceeded taxes owed, taxpayer parents could receive some or all of the excess (up to $1,000 per child) as a refund known as the additional child tax credit (ACTC), which was limited to 15 percent of earnings above $3,000.
Under the pre-reform rules, the CTC wasn’t allowed to a taxpayer for any qualifying child unless:
1. the taxpayer included the qualifying child’s name and taxpayer identification number (TIN) on the tax return for the tax year; and
2. the qualifying child’s TIN was issued on or before the due date for filing that return, including extensions.
The qualifying child’s TIN could be: (a) a social security number (SSN); (b) an ITIN, issued by the IRS to individuals who are ineligible for an SSN; or (c) an adoption taxpayer identification number (ATIN), assigned by the IRS to a child who has been placed for legal adoption by an authorized placement agency.
How does the child tax credit work after the reform?
Under the tax reform, the child tax credit is increased to $2,000. The amount that is refundable is increased to $1,400 per qualifying child. The earned income threshold is decreased from $3,000 to $2,500. A $500 nonrefundable credit (the so-called “family credit”) is also now provided for qualifying dependents other than qualifying children.
The income level at which the credit phases out is increased significantly from $110,000 to $400,000 for married taxpayers filing jointly and from $75,000 to $200,000 for all other taxpayers.
The law also changed with respect to the taxpayer identification requirement. Under the tax reform, the CTC is not allowed for any qualifying child unless the taxpayer includes the social security number (SSN only!) of that child on the tax return for the tax year.
An SSN for purposes of this requirement must be issued; (i) to a citizen of the U.S. (or aliens when they are lawfully admitted to the U.S. either for permanent residence or under a law permitting them to be employed in the U.S.); and (ii) before the due date of the return, including extensions.
When do the changes take effect?
The changes take effect with the 2018 tax year and, as of now, will remain effective through the 2025 tax year. Many expect that future legislation will extend the sunset date beyond 2025 and possibly make the changes permanent.
Due to the complexity of Trump’s reform legislation, we expect that we’ll be writing a number of additional blogs that analyze the tax reform. For the latest news and in-depth coverage of the tax reform provisions, including further analysis of accompanying regulations and IRS publications, stay tuned throughout the year!
By Ephraim Moss, Esq. & Joshua Ashman, CPA