Child Tax Credit - Citizen Living Abroad

[Yardley CPA]

I have a client who is married to a citizen of Honduras and has lived in Honduras for many years, working as a teacher there.  She has 4 children (all US Citizens) under the age of 17.  We have always filed MFS.  Her income is minimal and I obtain a letter from the school which indicates what her wages are and it converts the wages into US Dollars.  Her earned income from the school is normally around $25,000.  She has a couple of hundred dollars in interest and dividends combined.  Its a fairly straight forward return and one where I've always used the 2555ez to exclude her foreign income.  The 1040 reflects her wages on Line 7 and then Line 21 shows the wages as being excluded.  This results in only her interest and dividends in AGI which ultimately results in no taxable income. 

 

My client informs me that at some point after her return is filed and accepted the IRS sends her the necessary paper work to claim the Child Tax Credit.  Since it seems she is eligible, I would like to calculate it on the return when I prepare it.

 

In the past, while I included form 8812 on the return, it never calculated a child tax credit.  In looking at the form more closely this year, I notice that ATX has a fill in box on the 8812, Part II, Line 4a - Earned Income.  If I input her wages earned on this line it does calculate a Child Tax Credit.  I was always under the impression that the 2555 wipes out the earned income and that she would not be eligible for the credit...but I guess that isn't the case?? 

 

Can anyone offer any insight?  Thanks!

 

PS...I did find this on an older KPMG Tax Alert directed at "US Taxation of Americans Abroad":

 

Child Tax Credit

A taxpayer may claim a child tax credit for each qualifying child. A qualifying child is a child that is a U.S. citizen, national, or resident; is claimed as a dependent on the taxpayer’s return; is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (i.e., grandchild, niece, or nephew); is under 17 at the end of the tax year; did not provide over half of his or her own support for the tax year; and lived with the taxpayer for more than half the tax year.

The maximum amount of the credit is USD 1,000 for each qualifying child. The taxpayer’s total child tax credit is phased out as modified AGI exceeds USD 75,000 for a single individual, USD 110,000 for a joint return, and USD 55,000 for a married filing separate return. Modified AGI is determined without regard to the section 911 exclusion for foreign earned income. For some taxpayers, a portion of the credit may be refundable (i.e., may result in a refund if the credit exceeds the taxpayer’s tax liability).

Edited March 2, 2015 by Yardley CPA

[Pacun]

I always thought and think that the main home of the child has to be in the US for at least 6 months. No Mexico, Canada or any other country.

Edited March 2, 2015 by Pacun

[kcjenkins]

PS...I did find this on an older KPMG Tax Alert directed at "US Taxation of Americans Abroad":

 

Child Tax Credit

A taxpayer may claim a child tax credit for each qualifying child. A qualifying child is a child that is a U.S. citizen, national, or resident; is claimed as a dependent on the taxpayer’s return; is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (i.e., grandchild, niece, or nephew); is under 17 at the end of the tax year; did not provide over half of his or her own support for the tax year; and lived with the taxpayer for more than half the tax year.

The maximum amount of the credit is USD 1,000 for each qualifying child. The taxpayer’s total child tax credit is phased out as modified AGI exceeds USD 75,000 for a single individual, USD 110,000 for a joint return, and USD 55,000 for a married filing separate return. Modified AGI is determined without regard to the section 911 exclusion for foreign earned income. For some taxpayers, a portion of the credit may be refundable (i.e., may result in a refund if the credit exceeds the taxpayer’s tax liability).

Modified AGI is determined without regard to the section 911 exclusion for foreign earned income.  that seems to be the key here.  Seems strange, but then, a lot of the code seems strange these days. 

[Yardley CPA]

KC...I agree.  That does seem to be the key phrase.  Thanks to both of you for chiming in.