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Child Tax Credit and Foreign Earned Income Exclusion

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The U.S. government allows eligible parents to take a tax credit for up to $1,000 per qualifying child. In addition to various issues with respect to what constitutes a “qualifying child”, there are various complications with respect to the eligibility of the parents.

In this short essay, I will concentrate solely on the interaction of the parents’ income eligibility for the child tax credit and the foreign earned income exclusion.

General Income Limitations

Generally, in order to take full advantage of the child tax credit, the parents’ adjusted gross income (AGI) should be below a certain amount. The AGI amount will depend on your filing status as follows:

Married filing jointly – $110,000.

Single, head of household, or qualifying widow(er) – $75,000.

Married filing separately – $55,000.

If your AGI is above the relevant threshold, then you must reduce your child tax credit at the rate of $50 per each $1,000 of income above the threshold

Foreign Earned Income Exclusion and Income Limitation Calculation

Under I.R.C. §911, if certain conditions are met, Foreign Earned Income Exclusion allows a qualified individual to exclude as much as $92,900 (for tax year 2011) of his foreign earned income from taxable gross income. This means that, if eligible, you may reduce your AGI by as much as $92,900.

What happens then to the income limitation calculations for the purposes of the child tax credit?

Generally, in order to avoid giving U.S. taxpayers who work abroad an unfair advantage, the IRS requires you to follow the modified AGI rules in determining your income for the child tax credit phase out purposes. Under the modified AGI rules, you should add the amount excluded on lines 45 and/or 50 of Form 2555 to your regular AGI.  This means that you are adding the excluded amount back to your AGI to determine your eligibility for the child tax credit.

Thus, the Foreign Earned Income Exclusion is not likely to have any affect on your AGI calculations for the purposes of determining whether your income is above the child tax credit threshold and how much.

Contact Sherayzen Law Office For Legal Help With the Foreign Earned Income Exclusion

If you have any questions with respect to how Foreign Earned Income Exclusion works, contact Sherayzen Law Office at [email protected]. Our experienced international tax firm will guide you through the complex maze of the interaction of various sections of the U.S. tax law with the Foreign Earned Income Exclusion.

Foreign Earned Income Exclusion: 2011

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Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

The income exclusion amount for 2011 has increased to $92,900 (in 2010, it was $91,500).

Remember, if your overseas earnings are above $92,900 for the tax year 2011, then you will be subject to U.S. income taxation on the excess amount. For example, if you earned $105,000 in 2011, then you will have to pay U.S. income taxes on $ 12,100.

It is also important to note, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion). For most expats, this means that the tax bracket is likely to start at 25% or higher. If you are self-employed, however, your situation may differ from this description.

Contact Sherayzen Law Office For Foreign Earned Income Exclusion Legal Help

If you are a U.S. taxpayer living abroad or you are planning to accept a job overseas, contact us to discuss your tax situation. Our experienced tax firm will guide you through the complex maze of U.S. tax reporting requirements, help you make sure that you are in full compliance with U.S. tax laws, and help you take advantage of the relevant provisions of the Internal Revenue Code to reduce your tax burden.