Lowering Your US Expat Taxes Using the Child Care Credit

US expat taxes and the child care credit

There are many ways to lower your taxable income and your US expat taxes on your tax return. Most types of deductions and credits do this by using the expenses you incur on a day to day basis to figure the deduction or credit. For many working families, almost everywhere around the world, a big expense is child care. If you have paid a person or company to care for your child while you are working or going to school, you may be able to lower your US expat taxes using the Child Care Credit!

What is the Child Care Credit?

The credit, officially known as the Child and Dependent Care Credit, helps to reduce your US tax. Unlike a deduction, which lowers your taxable income before tax is calculated, a credit is a dollar for dollar reduction in your actual tax. For example – Given a 25% tax bracket, a $100 deduction will reduce your tax bill by $25, while a $100 credit reduces your tax bill by $100.

Who Can Take the Credit?

If you paid child care expenses for a qualified child, in order for you (and your spouse if filing jointly) to work or look for work, then you may be able to take the credit.

What is Required?

  • The child must be your dependent, aged 12 or under. Other individuals, who are physically or mentally unable to care for themselves, may also be considered a qualified individual regardless of age if you claim them on your tax return as a dependent.
  • You must have earned income on your return. If filing a joint return you and your spouse must both have earned income or be a full time student.
  • You cannot use expenses paid to your spouse (or the parent of the dependent), or to another of your children unless they are aged 19 or older. In other words, you cannot claim any amounts paid to the child’s other parent, or to a teenage sibling babysitter.
  • Your filing status cannot be Married Filing Separately.
  • Your child or dependent must have lived with you for more than half the year. There are some exceptions for dependents that live away from home due to divorce, illness, and school.
  • You will need to list the name, address, amount paid, and US tax ID number of the child care provider on your tax return. Foreign providers don’t need to have US tax ID.

What is Considered Earned Income?

Earned income is any income that you receive from wages, salaries, employee compensation, or net profits from self-employment. It does not include income from interest, dividends, or capital gains.

This is where the credit gets tricky for expats. In order for the credit to calculate, you must show earned income on your tax return. Most expats use the Foreign Earned Income Exclusion (FEIE), which excludes earned income on the return for the purpose of lowering your taxable income. Any earned income on your return after claiming the FEIE can then be used to figure the Child Care Credit.

Here is the dilemma with expats: If all your income is excluded using the FEIE, you cannot claim the Child Care Credit on your tax return. If you don’t exclude your income using the FEIE, it’s possible that your tax credits will not cover the taxes generated by your income.

What Else Should I Consider?

With an expat return, there are many more things that need to be considered when figuring your return:

  • Will you claim the Foreign Tax Credit?  Tax returns are calculated in a specified way, and there is a pecking order to claim tax credits. The Foreign Tax Credit comes before the Child Care Credit. If your tax will be reduced to zero by using the Foreign Tax Credit, you will not be able to take the Child Care Credit. If you will not be using the Foreign Tax Credit, or the Foreign Tax Credit only excludes part of your taxes, then you can take the Child Care Credit.
  • Will you claim the Foreign Earned Income Exclusion?  In order to show that you have earned income on your return, you can choose to not claim the FEIE on your return, and take the Child Care Credit (plus any other credits) to help you reduce your taxes. But you may open yourself up to more than just a single year of tax if you do this. If you have taken the FEIE in the prior year, and then choose to not use it on your current return, you will not be able to claim it again for 5 years! There are ways to claim a partial year FEIE on your return, leaving some earned income to calculate the Child Care Credit, but you should talk with your tax advisor to see what the best outcome for you would be.

So, while there is a chance that you could recoup up to 35% of your child care expenses as a tax credit on you US expat taxes, there are many considerations you need to make as an expat. Looking into all ways that you can configure your return with the FEIE and other tax credits, may allow you to claim more and pay less!

Looking For Expert Help On Your US Expat Taxes?

At Greenback, we make life better for Americans living abroad. We do that by taking away the anxiety and hassle of getting and staying compliant with US taxes while overseas—helping expats navigate a ridiculously complex system in a way that makes sense for their individual situation. Get started with us now.