What is the Child Tax Credit and Its Refundable Portion?

The Child Tax Credit (CTC) is a tax benefit designed to help families offset the costs of raising children. For tax year 2024 (returns filed in 2025), the CTC provides up to $2,000 per qualifying child under age 17. This credit is partially refundable, meaning if the non-refundable portion exceeds your tax liability, you may receive the remainder as a refund through the Additional Child Tax Credit (ACTC), up to $1,700 per child.

To qualify for the CTC, the child must meet several criteria: they must be under 17 at the end of the tax year, be a U.S. citizen, national, or resident alien with a valid Social Security Number (SSN), live with you for more than half the year, and not provide more than half of their own support. As an expat, these rules apply regardless of where you live, as long as you file a U.S. tax return.

The refundable ACTC is calculated as 15% of your earned income over $2,500, capped at the unused portion of the CTC. This makes it particularly valuable for lower- to middle-income families. However, phaseouts begin at modified adjusted gross income (MAGI) of $200,000 for single filers or $400,000 for married filing jointly, reducing the credit by $50 for every $1,000 over the threshold.

For expats, the CTC itself can reduce any U.S. tax owed on non-excluded income, but the ACTC’s refundability is where the real benefit lies – especially if your tax liability is zero due to expat tax breaks.

Eligibility for the Refundable Child Tax Credit as an Expat

U.S. citizens and green card holders living abroad are generally eligible for the CTC and ACTC, just like domestic taxpayers. However, there’s a catch: the ACTC requires “earned income” that is not excluded under the FEIE. Earned income includes wages, salaries, and self-employment income, but if you elect the FEIE to exclude up to $126,500 (for tax year 2024) of foreign-earned income, that excluded amount doesn’t count toward the ACTC calculation.

This means if you exclude all your foreign income via FEIE and have no other U.S.-sourced earned income, your eligible earned income for ACTC purposes drops to zero, disqualifying you from the refundable portion. According to IRS guidelines, the ACTC is only available on income subject to U.S. tax – a key distinction for expats.

Additionally, the child must have an SSN issued before the tax return due date, and expats must file Form 1040 (not 1040-NR). If you’re a bona fide resident of Puerto Rico or another U.S. territory, special rules may apply, but for most overseas expats, standard U.S. rules govern.

Recent IRS updates for 2024 confirm the ACTC maximum at $1,700, with no major changes from 2023 except inflation adjustments. However, as we’ll discuss later, proposed legislation like the One Big Beautiful Bill Act could increase the CTC to $2,500 starting in tax year 2025.

The Impact of Foreign Earned Income Exclusion on ACTC

The FEIE is a powerful tool, allowing expats to exclude up to $126,500 (2024 amount, indexed for inflation) of foreign-earned income from U.S. taxation if they meet the physical presence or bona fide residence test. While this can eliminate U.S. tax on salary or business income, it comes at a cost for refundable credits like the ACTC.

Technically, under IRC Section 24, the refundable credit is limited to 15% of taxable earned income exceeding $2,500. Excluded income under Section 911 (FEIE) is not considered “taxable” for this purpose. As a result, many expats who fully utilize FEIE end up with zero or reduced ACTC, even if they have qualifying children.

This trade-off is crucial: the FEIE might save you thousands in taxes if your foreign tax rate is low, but it could cost you up to $1,700 per child in refunds. Expats in high-tax countries might fare better with the FTC, which doesn’t exclude income but credits foreign taxes paid, preserving eligibility for ACTC.

Choosing Between FEIE and Foreign Tax Credit for Optimal ACTC Benefits

To maximize the refundable CTC, expats often need to weigh FEIE against FTC. The FTC allows you to credit foreign income taxes paid against your U.S. tax liability, potentially reducing it to zero without excluding income. This keeps your earned income “taxable” for ACTC purposes.

For instance, if you’re in a country with taxes higher than the U.S. rate, FTC might fully offset your U.S. tax, and you’d still qualify for ACTC based on your full earned income. Conversely, in low-tax jurisdictions like the UAE or Hong Kong, FEIE might be better overall, but you’d forfeit ACTC.

IRS Form 1116 is used for FTC, and you can elect to switch strategies year-to-year, but once you revoke FEIE, you can’t reclaim it for five years without IRS approval. Consulting a CPA is essential to run scenarios based on your specific income, foreign taxes, and family size.

Step-by-Step Calculation Example for Expats

Let’s illustrate with a hypothetical expat family for tax year 2024. Assume Sarah, a U.S. citizen living in Spain, is married filing jointly with her non-U.S. spouse. They have two qualifying children under 17. Sarah earns $80,000 in foreign salary, pays $10,000 in Spanish taxes, and has no other income. We’ll compare FEIE vs. FTC.

Scenario 1: Using FEIE

1. Exclude $80,000 via FEIE (full amount under limit).

2. Taxable income: $0 (assuming no other income).

3. U.S. tax liability: $0.

4. CTC: $4,000 ($2,000 x 2), but since liability is $0, non-refundable portion is unused.

5. ACTC calculation: Earned income for ACTC = $80,000 – $80,000 excluded = $0.

6. 15% of ($0 – $2,500) = $0 (can’t be negative).

7. ACTC: $0. Total refund from CTC/ACTC: $0.

Scenario 2: Using FTC Instead

1. No exclusion; taxable income: $80,000 (minus standard deduction of $29,200 for MFJ = $50,800).

2. Tentative U.S. tax: Approx. $5,500 (using 2024 brackets: 10% on first $23,200, 12% on next $27,600).

3. FTC: $10,000 foreign taxes paid, but limited to U.S. tax on foreign income (~$5,500), so full credit applies.

4. Tax liability after FTC: $0.

5. CTC: $4,000 reduces liability (already $0), so unused.

6. ACTC: Earned income = $80,000 (not excluded).

7. 15% of ($80,000 – $2,500) = 15% of $77,500 = $11,625 (but capped at unused CTC of $4,000 and per-child max of $1,700 x 2 = $3,400).

8. ACTC: $3,400. Total refund: $3,400.

By choosing FTC, Sarah gets a $3,400 refund despite zero tax liability. Note: Actual calculations use Form 8812 and consider phaseouts (her MAGI is under $400,000, so no reduction).

Recent Changes and What to Expect for Tax Year 2025

As of August 2025, the IRS has implemented inflation adjustments for 2024 filings, with ACTC at $1,700. However, the One Big Beautiful Bill Act, enacted earlier this year, introduces changes for tax year 2025: the CTC increases to $2,500 per child through 2028, with potential adjustments to refundability. New SSN rules emphasize timely issuance for dependents. Expats should monitor IRS updates, as these could enhance ACTC benefits but may alter phaseouts or FEIE interactions.

Additionally, the Earned Income Tax Credit (EITC) – another refundable credit – has seen minor tweaks, but it rarely applies to expats due to income exclusions.

How to Claim the Refundable Child Tax Credit: Form 8812 and Filing Tips

To claim ACTC, complete Schedule 8812 (Credits for Qualifying Children and Other Dependents) with your Form 1040. Attach proof of children’s SSNs and residency if audited. Expats filing from abroad get an automatic extension to June 15, but interest accrues on owed taxes from April 15.

Common pitfalls: Forgetting to elect out of FEIE on Form 2555, miscalculating earned income, or overlooking phaseouts. Use IRS Publication 972 for detailed worksheets.

Conclusion: Maximize Your Expat Tax Benefits

The refundable Child Tax Credit offers substantial relief for U.S. expat families, but navigating FEIE, FTC, and eligibility rules requires expertise. With potential increases on the horizon, now is the time to review your strategy. As an expat CPA, I’ve helped countless families claim thousands in refunds – don’t leave money on the table.

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