2021 Advanced Child Tax Credit for U.S. Taxpayers – but not U.S. Expats.

As the COVID pandemic ground the world to a near halt, business and jobs were put under tremendous stress, not knowing what to expect, when to open and whether they would have to cut costs by making employees redundant.

The U.S. Government released several Acts of Congress that injected a much-needed stimulus into the economy by paying U.S. taxpayers a direct cash amount in the form of 3 Economic Impact Payments.

Wasn’t it a pleasant surprise so find out that American’s Abroad could also be eligible for this payment? All you had to do was file your taxes. Easy!

But what about the other enhanced credits available in the latest American Rescue Plan Act? Let’s explore together.

The American Rescue Plan Act

Let’s begin by breaking down what credits were included in this Act.

  • Suspended repayment of the Advanced Premium Tax Credit.
  • Increase of the child & dependent care credit for 2021 only.
  • Expansion of the childless taxpayer’s Earned Income Tax CreditExpand child tax credit for 2021 only.
  • Advanced payment of the child tax credits.
  • Third round of Economic Impact Payments.

I’ve covered the main ones applicable to Americans living abroad below. For more detail visit the IRS webpage.

Economic Impact Payment #3

We were all delighted when the third round of stimulus payments were signed into law by President Biden. Especially as the lingering pandemic and lockdowns has had a massive impact on economies around the globe and taxpayer’s livelihoods.

The third round of EIP payments began being paid to taxpayers from the end of March and will continue to be paid throughout the 2021 tax year.

EIP #3 is a credit for the 2021 tax year, paid in advance to taxpayers who have filed their 2019 or 2020 U.S. Tax return.

Stimulus payment #3 is worth $1,400 to each eligible U.S. taxpayer and their qualifying children. This should be direct deposited to your account or sent as a check.

The IRS base the payment amount on your income from 2019 and 2020. Those who earn more than $75,000 (single, MFS), $112,500 (head of household) or $150,000 (MFJ) will begin to see their EIP payment phase out and be completely eliminated at $80,000 (single or MFS), $120,000 (head of household) and $180,000 (MFJ).

If you haven’t received yours in 2020 don’t worry, you can claim it as a refund with your 2021 taxes.

Will there be a 4th Stimulus payment for Americans? As soon as we know, you will know. Watch this space.

Child & Dependent Care Credit

President Biden did say in his Presidential campaign that he would focus on lifting people out of poverty and implement ways that childcare for working parents could be more affordable.

As part of that plan, we have seen the enhancement of the allowable expenses for child and dependent care from $3,000 to $8,000 per qualifying child, maxing out at $16,000 for two or more qualifying children.

The credit itself for families has increased from 35% to 50%, meaning there is a credit of potentially $4,000 or $8,000 to be claimed by taxpayers who meet all criteria.

This credit is FULLY REFUNDABLE for 2021 only. Time to have that conversation with your tax adviser or schedule a tax advice appointment with S.E. Tax Professionals.

A little-known piece of information for Americans living abroad and paying childcare costs is that you can still qualify for this credit.

The IRS does allow for costs to a foreign child or dependent care provider to be eligible for the credit. But beware, the same excluding factors that apply to an America provider will apply to a foreign provider. For example, exclusion for high earners and taxpayers with a married filing separate status.

Child Tax Credit for 2021

The increase in the child tax credit has definitely been a highlight of the American Rescue Plan Act and very welcomed by taxpayers both in the U.S. and Abroad.

For eligible taxpayers with qualifying children, we will see an increase in the child tax credit from $2,000 per qualifying child to $3,600 per qualifying child up to age 6 and $3,000 for children between age 6 up to and including age 17.

The most notable part if this increase in the child tax credit is the advanced payments!

Eligible taxpayers will begin to receive monthly direct payments from July 2021 based on their latest tax return. Each deposit will be an instalment of half their credit entitlement with the remaining half to be claimed on their 2021 tax return.

But wait! This one has a catch for us expats living abroad.

The credit follows the same eligibility criteria as the Earned Income Tax Credit (EITC) rules. Americans living abroad are excluded from claiming this credit if they have not lived in the USA for 6 months of the year.

That means……..sorry, but no advanced child tax credit payments for Americans abroad.

You may still be eligible for the standard $2,000 per qualifying child and the refundable portion of the credit $1,400, provided you meet the eligibility criteria and do not claim the Foreign Earned Income Exclusion. I’ve covered more on that in an earlier article about called Refundable Child Tax Credits.

What if the IRS pay me the Child Tax Credits Automatically?

The short answer is you need to pay it back with interest and risk being penalized.

As a practitioner with a lifelong career in tax, I have seen year on year how the IRS are cracking down on taxpayers who falsely claim refundable credits.

Not only taxpayers, but tax practitioners who incorrectly claim refundable credits for their clients! The penalties are substantial I must say, and tax practitioners are subject to increased scrutiny and due diligence requirements each year.

I foresee this to be an area of tax that the IRS will not only hold up tax returns and delay refunds to verify the accuracy but could trigger an audit if errors and false claims are found.

So, what can you do about it?

The IRS are planning to launch a taxpayer portal by July 1, 2021, to allow taxpayers to opt out. I do recommend opting out if you do not qualify for the advanced payment of the credits.

My advice to all Americans living overseas, who claim their children as dependents:

  1. Speak to your tax adviser to find out if you qualify for the child tax credits and advanced payments.
  2. If you don’t have a tax adviser book an advisory call with S.E. Tax Professionals.
  3. Opt-out if you are not eligible for the payments.

All advisory calls are conducted by a highly qualified tax practitioner permitted to practice with the IRS.

Skip to content