Child Tax Credit

The United States is one of the few countries that requires its citizens to report and pay tax on their world wide income, no matter where they live. This means that even if a U.S. citizen lives in a foreign country (Foreign Tax Return) they still have a Tax Filing Requirement just as much as somebody who lives in New York City. This is true even if the U.S. citizen never even took one step in the United States and all of his income is from the foreign country that he lives in.

At first this seems like a burden, and even worse it seems as if one is subject to paying double tax, one to the country of residence and then to the United States. However, this is not so in many cases. Actually it could be a very big benefit having a U.S. tax filing requirement.

Why is that? The Internal Revenue Service (the U.S. department of collecting tax) recognizes tax paid to the country of residence as a credit to the tax owed to the United States on that income. This is called the Foreign Tax Credit.

Okay, so there is no tax owed to the United States but what is the benefit of filing a tax return?

There are several refundable credits that many people are eligible for. A refundable credit means that even if you owe no tax (due to the foreign tax credit, as mentioned above or other reasons) the IRS will send you money equal to the amount of the refundable credit.

So what are these Tax Return Credits?

One is the Child Tax Credit; the other two are the Recovery Rebate Credit and the Making Work Credit.

The Child Tax Credit applies to all years. Recovery Rebate Credit is only for the 2008 tax year and Making Pay Credit is for 2009 and 2010 tax years.

Child Tax Credit - this credit allows for a $1,000 per child that is a U.S. Citizen. At first the credit will reduce that taxed owed, but if there is no tax then the money will be given to the taxpayer. This credit is calculated on two factors, besides on the number of children one has. One is the total income of the taxpayer. If one's income is above a certain limit then the credit amount is reduced. The second is that the taxpayer needs to have enough earned wages. If one's wages do not exceed a certain amount then the credit will be reduced.

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