The Additional Child Tax Credit can provide taxpayers up to $1,700 per qualifying child in 2025 as a refundable credit. The ACTC not only reduces the amount of tax owed but can also result in a refund from the IRS if the credit exceeds the tax liability. Non-refundable credits can only reduce a taxpayer’s tax bill to zero. Refundable credits, like the ACTC, can generate a payment if the credit is greater than the amount of tax owed.
For U.S. citizens and resident aliens living abroad, claiming the ACTC is complicated by Internal Revenue Code Section 911, which governs the Foreign Earned Income and Foreign Housing Exclusions. These are significant benefits for overseas taxpayers. The challenge lies in IRC Section 24(d)(3) governing the ACTC which prohibits taxpayers who elect any exclusion under Section 911 for a taxable year from claiming the ACTC.
The IRS is intensifying scrutiny of expat filings claiming the ACTC due to frequent errors and overpayments. Recently, the IRS issued an International Practice Unit specifically addressing the ACTC for U.S. persons abroad. The IPU educates IRS agents on identifying improper ACTC claims, including those involving Section 911 exclusions.
Section 911 Barrier to ACTC Eligibility
The ACTC is the refundable portion of the Child Tax Credit for each child under the age of 17. Among other requirements, eligibility requires a U.S. citizen or resident alien child with a valid Social Security Number issued before the filing deadline, with the taxpayer providing at least half the child’s financial support.
The CTC phases out at higher modified adjusted gross income levels, and the ACTC requires at least $2,500 in earned income not excluded from U.S. taxation. The ACTC equals 15% of earnings that exceed the $2,500 refundability threshold, up to the maximum amount of the refundable credit ($1,700 per child in 2025). Due to the phase out limits, the ACTC won’t help taxpayers with high income levels. Nonethless, it can provide a significant financial boost to other taxpayers, especially those with several children.
Assuming certain qualification tests are met, IRC Section 911 provides valuable benefits to taxpayers living and working abroad. It allows expats to exclude up to $130,000 of foreign-earned income in 2025. In addition, it permits the exclusion of certain employer-provided housing costs. The law governing the ACTC states that the ACTC “shall not apply to any taxpayer for any taxable year if such taxpayer elects to exclude any amount from gross income under section 911 for such taxable year.” Thus, because of the prohibition set out in section 24(d)(3), electing either the FEIE or Foreign Housing Exclusion, or both, will completely disqualify the taxpayer from claiming the ACTC.
Strategic Alternative: Foreign Tax Credit
To claim the ACTC, expats must forgo Section 911 exclusions entirely. Many will be able to use the Foreign Tax Credit, instead. The FTC offsets the taxpayer’s U.S. tax liability on a dollar-for-dollar basis with foreign taxes paid. This keeps the foreign earned income taxable and preserves eligibility for the ACTC. The FTC will not be helpful for taxpayers residing in a foreign country that does not impose an income tax or equivalent (e.g., the United Arab Emirates, or the Kingdom of Saudi Arabia).
Making the choice requires careful planning. Once a taxpayer elects to use the FEIE or foreign housing exclusion, that choice remains effective for all later years unless the taxpayer revokes it. This means the taxpayer must continue to make the same choice each subsequent year or he will be considered to have revoked the Section 911 exclusion election. Switching to the FTC after having made the Section 911 election will be treated as an implied revocation. After a revocation, a taxpayer cannot re-elect use of any Section 911 exclusions for a five- year period without first obtaining IRS approval.
Audits On the Horizon: IRS Scrutiny of Expat ACTC Claims
The IRS has heightened oversight of expat CTC and ACTC claims due to widespread errors that resulted in many overseas taxpayers receiving improper payments. The recent IRS IPU addressing the CTC and ACTC for U.S. persons abroad outlines what agents should look for including verifying income, whether the claimed credits exceed the limitations, taxpayer residency, whether the taxpayer is a U.S. citizen, proper tax filing status, and child eligibility. The recent release of the IPU serves as a warning that IRS audits of expatriate tax returns claiming CTC and ACTC are likely to increase.
In preparation for a possible audit, taxpayers should ensure they have retained necessary tax records. For example, records for at least 3-years regarding income, child support, and foreign tax payments. Given they live and work in a foreign country, such taxpayers most likely have foreign financial accounts. This means they should have records covering 5-years for FBAR-related non-U.S. financial accounts. Increased audit risks are on the horizon; it is best to be well prepared beforehand.
In the meantime, taxpayers may wish to consult their tax advisors to make sure of eligibility before claiming the CTC or ACTC. Once confirmed, the overseas taxpayer can file Form 1040 with Schedule 8812 accurately, leveraging the automatic extension to June 15, 2025, for 2024 returns (or October 15 with Form 4868).
Conclusion
For Americans living abroad, claiming the ACTC involves navigating a maze of tax rules. Electing any Section 911 exclusion whatsoever prevents access to this valuable credit. Choosing the Foreign Tax Credit instead in order to maintain ACTC eligibility requires careful planning within a complicated global tax landscape.
With the IRS’ recent release of an International Practice Unit dedicated to educating its agents about the possible invalidity of ACTC claims by U.S. persons living overseas, expats need to proceed very cautiously. The possibility of audits and close regulatory watch means taxpayers must be prepared to demonstrate compliance and should now be reviewing records to make sure all is in order.
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This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.
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