The Child Tax Credit
As a U.S. person, you have certain obligations, such as the requirement to file annually your tax return and FBAR, above certain thresholds, but you are also might be entitled to certain privileges, even if you live outside the U.S. and never had actually to pay U.S. taxes. Two of the most significant benefits for U.S. citizens living abroad are the child tax credit and the education credit. The sections below will cover further explanations and the eligibility criteria for the child tax credit.
Background on the Child Tax Credit
U.S. citizens who claim at least one child as their dependent on their tax return may be eligible to benefit from the child tax credit. The maximum amount of the credit is $2,000 per qualifying child, but "only" $1,400 per qualifying child might be refundable (i.e. you can receive as a payment). The exact credit amount depends on the income amount, the number of children, and the filing status.
The credit is meant for the lower-middle classes who have an active income (employees, self-employed) of at least $2,500 but less than $200,000 ($400,000 if married filing jointly).
You can claim the Child Tax Credit, up to 3 years back (currently, tax year 2017).
Criteria for the Child Tax Credit
To qualify for the Child Tax Credit, your child must meet all of the following conditions:
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The child is a U.S. citizen, U.S. national, or U.S. resident alien.
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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 (for example, your grandchild, niece, or nephew).
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The child was under age 17 at the end of the tax year.
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The child did not provide over half of his or her own support for the tax year.
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The child lived with you for more than half of the tax year (some exceptions apply).
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The child is claimed as a dependent on your return.
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The child must have a social security number (SSN) which was issued by the Social Security Administration before the due date of your tax return (including extensions). If your child does not have the required SSN, you cannot use the child to claim the child tax credit.
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You can check if your child is qualifying for the Child Tax Credit in this IRS link. Our suggestion is to consult with us.
Restriction while claiming the Child Tax Credit
One of the main restrictions which might lower your refundable credit is the disallowance to exclude your foreign earned (active) income when claiming the Child Tax Credit. This means that you need to offset your U.S. tax liability with foreign (Israeli) income taxes you paid. Usually, that would not be an issue since the tax brackets in Israel are higher than in the U.S., but the problem is that children in Israel decrease the tax liability by additional credit points ("Nekudut Zickuy"). Therefore a professional judgment is required to determine the better approach.
How to file
The child tax credit is calculated and determined as part of the annual tax return to the IRS. It cannot be submitted separately.
Improper Claims
If you erroneously claim the child tax credit, even though you are not eligible for the credit, and it is later determined that your error was due to reckless or intentional disregard of the rules, you will not be allowed to claim any of these credits for 2 years. If it is determined that your error was due to fraud, you will not be allowed to claim the credit for 10 years. You may also have to pay penalties.