Tax for Expats: Claiming Dependents on Your US Tax Return

Tax for Expats: Claiming Dependents on Your US Tax Return
October 12, 2016

As an American living abroad, there are many considerations to make when it comes to tax for expats – your US taxes, foreign taxes, deductions, credits, exclusions and more. One thing you may not have thought about but should is whether or not you should include your children on your US tax for expats. It can be to your advantage to include them, but there are some things to consider before doing so.

Advantages of Claiming Children on Tax Return

Because of the additional exemptions and credits available, it’s often financially advantageous for you to include your children or other dependents on your US tax for expats as a way to reduce your tax liability. To be claimed as a dependent, one must pass the requirements as a qualifying child or relative, in addition to the dependent requirements – one of which is to either be a US citizen or national, or a resident of the US, Mexico or Canada. There are also exceptions for adopted children. So, how can you save on taxes by including your children? Read on.

  • Child Tax Credit – You can receive up to $2,000 per child and can be claimed if you have US person child dependents on your tax return (must be under the age of 17 during the tax year). The credit is modified based on your income and filing status, and there is an additional child tax credit that could lead to a refund for you. However, if you claim the Foreign Earned Income Exclusion, you will not be eligible for the additional portion. That’s why it’s so important to crunch the numbers to see if taking this credit will be beneficial for you!
  • Child and Dependent Care Credit – This credit can be taken if you paid for child care expenses for a qualifying child in order for you to work or look for work. There are certain limitations regarding taking this credit in addition to other expat tax credits, deductions and exclusions, so take the time to review these considerations before opting to take this credit.
  • Education Credit – If you have a college student who attends an eligible institution, you may be able to claim up to $10,000 in tax credits, which might even lead to a refund! An eligible institution is one that participates in the US Federal Student Aid Program, and can provide you a Form 1098-T on which to report tuition and fees.

You can learn more about these advantageous ways to save on tax for expats by downloading a US expat tax guide for your specific expat tax situation.

Impact of Including Children on Tax Return

If you include your child on your tax return, you are indicating to the IRS that your child is a US citizen (or one of the other categories mentioned above), and therefore, has a tax-filing obligation. This means that your child’s worldwide income will be subject to US taxation from that point forward. While earning an income may not be on your child’s radar at the moment, when they do begin earning money, the reporting requirement will need to be taken seriously. Often, these children do not realize that they have a reporting obligation later in life. Because of this, they may wind up with delinquent taxes, making it troublesome if they opt to relocate to the US, as it could affect them when taking out loans, doing business, purchasing property, etc.

Disadvantages of Claiming Children on Tax Return

In addition to the US tax-reporting requirement your children will face if you claim them on your tax for expats, they may find that it causes other complications. One of which deals with immigration. As a US citizen, they’ll be required to travel on a US passport to the States, but if they don’t realize they are citizens, they may travel using their home country passport and end up being tagged at the US border.

Also, with the great emphasis on reporting all foreign financial accounts to the US government, your child will be faced with a lifetime of keeping track of all foreign trusts, partnerships, companies, bank accounts, mutual funds, properties and more and possibly needing to report those via Foreign Bank Account Report (FBAR) and FATCA Form 8938. While these reporting tools are primarily informational, failing to report all qualifying foreign funds can lead to steep penalties and even criminal prosecution.

While you may think your child can simply choose to renounce their US citizenship in the future if they want to avoid these challenges, it’s not as easy as many people believe. There are very specific rules in place and there are certain income thresholds and other requirements that must be met in order to renounce. It’s important to consider this when deciding whether to claim your child on your tax for expats, since doing so may make their tax situation complicated once they begin earning an income.

Have More Questions About How Claiming Dependents Affects Expat Taxes?

Our team of expat-expert CPAs and IRS Enrolled Agents are here to help by providing the tax advice you need for a more hassle-free expat tax experience. Contact us today!

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