I am eligible for the child tax credit (x3 children) but it's not being applied, with the reason given that my taxable income is $0. However, it's also showing that I owe $2500 on my federal return. I am self-employed and live in the UK, so I receive the Foreign Earned Income Exclusion which is why my taxable income is $0. But the $2500 comes from the self-employment tax --- my understanding is that the Foreign Earned Income Exclusion does not apply to this. The Child Tax Credit should though -- at least it did last year. (Notwithstanding the fact that the UK has a reciprocal agreement with the US for social security?). How can I fix this please? Thanks.
If you file with a Form 2555 in your return (the Foreign Earned Income Exclusion) then you aren't eligible for the refundable portion of the Child Tax Credit known as the Additional Child Tax Credit (ACTC). Only the refundable credit can be applied as a payment to your return, lowering a balance due to self-employment tax.
If you are paying the UK for self-employment tax (or the equivalent) on the same income you can claim exemption from self-employment tax. You will need to mail in your return with the required certificate received from the UK. HERE is information on how to obtain that certificate.
You have until June 15 to file your return as a citizen living abroad. If you will need time beyond that to obtain the certificate, you may wish to file an extension.
For citizens living abroad with dependents under the age of 17, it can be beneficial to elect NOT to use the Foreign Earned Income Exclusion (FEIE), but instead to take a credit for taxes paid to another country on foreign-earned income. This allows the taxpayer to receive the ACTC.
However, if the FEIE has been taken in the past, we urge caution and suggest reaching out to a tax advisor experienced in foreign tax matters. Failing to take the exclusion after taking it previously revokes it and once revoked the FEIE cannot be used again for 5 years, without special permission from the IRS that is difficult and expensive to obtain.