There is a common misconception that “I don’t live in the US, so I don’t need to file a tax return.”
Who needs to file a tax return?
All US citizens regardless of country of residence have a requirement to file a tax return if their earned income for 2020 exceeds $12,400 for single taxpayer and $24,800 for married filing jointly (under age 65). For anyone who is filing as Self-Employed The filing requirement is when their income exceeds $400.
By living outside of the Unites States one can get certain exclusions of income and tax benefits.
April 15th is the annual tax deadline for personal returns and March 15th for partnerships and S corporations. There is automatic extension for U.S. citizens living abroad until June 15th. One may also apply for a 6-month extension; however, extensions do not apply to any tax payments due as these need to be made by the April 15th deadline to avoid penalties and interest.
What Is the Child Tax Credit?
The Child Tax Credit’s (CTC) purpose is to give an income boost to the parents or guardians of dependents under the age of 17. The credit is up to $2,000 per dependent and is determined by the taxpayer’s income. One’s income needs to be more than $2,500 annually to qualify for the CTC. Once income exceeds $200,000 for single filers and $400,000 for joint filers, the credit starts to phase out. The tax credits directly reduces the amount owed to the IRS. The CTC refundable portion is up to $1,400 per dependent. That means if one qualifies for the CTC and their tax liability is below zero, the IRS will send the remaining amount of the credit, up to $1,400 per child. The CTC also caps the refundable portion of the CTC to 15% of your earned income that exceeds $2,500. So, one would need to have at least $11,830 of earned income to qualify for the full refund of $1,400.
Some of the eligibility requirements for the Child Tax Credit include:
- You must have provided at least half of the child’s support during the last year, and the child
must have lived with you for at least half the year (with some exceptions).
- The child cannot file a joint return
- The child is 16 years old or younger by the end of the year
Avoiding Double Taxation on Foreign Income
One of the issues that arise in our tax system is that one can be doubly taxed on their income earned – both by their country of current residence and the US. This is especially relevant for an American living abroad who may qualify as a resident in other local tax systems.
Many US citizens living in Israel are eligible for the child tax credit. There is bilateral tax agreement between US and Israel to avoid double taxation of their income. When a US citizen lives in Israel and earns a salary or self-employment income, they have a requirement to report and pay taxes on this income to Israel. Once taxes are paid, one can use the foreign tax credit to reduce or eliminate all income tax due in the US. By doing this, if one’s income falls into the right threshold, they will be eligible to receive the child tax credit. (Note, self-employed individuals still have a requirement to pay social security tax to the US as the tax treaty does not include this provision).
Foreign Bank Account Reporting
There is also a requirement for US citizens living abroad to file an FBAR- Foreign Bank Account Report. This includes reporting of any non-US bank, pension, insurance or provident (keren hishtalmut) funds. The threshold for filing is if the total balance in all accounts combined exceed $10,000 at any point during the year. The due date for the FBAR is April 15 th with an automatic extension until October 15th .
US Citizens living abroad tend to overlook their US filing obligations. This can cause a lot of trouble down the line since the Israeli banks are communicating with the US governments about any US citizens that hold accounts in Israel. Besides for your obligation, it may get you the tax credits you are entitled to as a US citizen!
With our personalized service we are dedicated to assisting our clients so we can ensure compliance while enabling you and your business to succeed and maximize growth. In addition to servicing US citizens and residents we specialize in clients with dual citizenship who have income around the world. Our services include preparation and filing of US income tax returns for individuals, partnerships and corporations, business formations, tax consultation, financial planning, bookkeeping and FBAR reporting.