Taxation of US children abroad
Please note, this article discusses the taxation of children who are US citizens/taxpayers. It is not intended to explore the pros and cons of your children becoming US citizens or how to obtain US citizenship.
Although it may not be immediately obvious, US children can face very complex tax situations. Many of these issues arise because parents are unaware that their children may have filing requirements. As a result, they may not take the necessary steps to ensure their children comply with US tax laws and avoid penalties. Despite not being immediately obvious, US children can have very difficult tax situations. Most issues derive from the fact that many parents are unaware that their children have filing requirements and therefore do not take the appropriate measures to ensure that their children do not fall foul of any penal tax regimes or maintain compliance.
Filing Requirements for Dependents
Filing requirements for dependents are complicated and depend on several factors, such as the child’s levels of earned and unearned income and their marital status. If your child qualifies as a dependent (see the IRS definition of Dependents), they may need to file a tax return if their unearned income exceeds $1,300 or earned income exceeds $14,150. In some cases, it is possible to elect to include the child’s income on your (the parent’s) tax return instead of having the child file separately.
Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)
As mentioned earlier, one factor that affects US children is unearned (investment) income. If a child’s unearned income exceeds $2,600 (TY 2024), they may be subject to the "Kiddie Tax." This tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24). The tax works as follows:
As a result, if the parent claiming the child as a dependent is a high earner, the child’s unearned income could be taxed at a considerably high rate.
Electing to Report a Child’s Interest and Dividends on the Parent’s Tax Return
It is possible to avoid the need for a child to file a US tax return by electing to report the child’s interest, dividends, and capital gains distributions on the parent’s tax return. To qualify for this election, the child must not have any other type of income, and their gross income cannot exceed $13,000.
If you are unsure whether your child meets the filing requirements, please contact us for clarification.
Passive Foreign Investment Company (PFIC)
Similarly, to adult US taxpayers, US children are also subject to the same penal tax regime if they invest in PFICs. This can be an issue when parents or other relatives set up ISAs for the child without being aware of the potential issues and filing requirements they will be subject to. For more information on PFICs please see our page.
Foreign Bank Account Report (FBAR)
Currently, the reporting threshold for US persons with foreign accounts is if the aggregate value of these foreign accounts exceeds $10,000 at any point during the year. This threshold does not have an age limit, meaning some US children may be required to file an FBAR each year.
Failure to report can result in severe consequences. If your child should have filed an FBAR in the past or is required to file one this year, please contact us.
Additional Child Tax Credit/Child Tax Credit (ACTC/CTC)
If a child qualifies as a dependent (as per the IRS definition), the parent or guardian can report them on their tax return. By doing so, the taxpayer may receive certain benefits associated with having a dependent.
If filing using foreign tax credits, the taxpayer may be eligible for the Child Tax Credit (CTC) or the Additional Child Tax Credit (ACTC). The CTC is a non-refundable credit of up to $2,000 per child that can offset US tax liability. If the taxpayer cannot use the full CTC, they may be able to claim the ACTC, which is a refundable credit. For US taxpayers abroad, the maximum ACTC available is $1,700 per child (TY 2024). US taxpayers abroad may therefore receive refunds each tax year due to having dependents.
Although it may not be immediately obvious, US children can face very complex tax situations. Many of these issues arise because parents are unaware that their children may have filing requirements. As a result, they may not take the necessary steps to ensure their children comply with US tax laws and avoid penalties. Despite not being immediately obvious, US children can have very difficult tax situations. Most issues derive from the fact that many parents are unaware that their children have filing requirements and therefore do not take the appropriate measures to ensure that their children do not fall foul of any penal tax regimes or maintain compliance.
Filing Requirements for Dependents
Filing requirements for dependents are complicated and depend on several factors, such as the child’s levels of earned and unearned income and their marital status. If your child qualifies as a dependent (see the IRS definition of Dependents), they may need to file a tax return if their unearned income exceeds $1,300 or earned income exceeds $14,150. In some cases, it is possible to elect to include the child’s income on your (the parent’s) tax return instead of having the child file separately.
Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)
As mentioned earlier, one factor that affects US children is unearned (investment) income. If a child’s unearned income exceeds $2,600 (TY 2024), they may be subject to the "Kiddie Tax." This tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24). The tax works as follows:
- The first $1,300 of unearned income is covered by the kiddie tax’s standard deduction, so it is not taxed.
- The next $1,300 is taxed at the child’s marginal tax rate.
- Any income above $2,600 is taxed at the parents’ marginal tax rate.
As a result, if the parent claiming the child as a dependent is a high earner, the child’s unearned income could be taxed at a considerably high rate.
Electing to Report a Child’s Interest and Dividends on the Parent’s Tax Return
It is possible to avoid the need for a child to file a US tax return by electing to report the child’s interest, dividends, and capital gains distributions on the parent’s tax return. To qualify for this election, the child must not have any other type of income, and their gross income cannot exceed $13,000.
If you are unsure whether your child meets the filing requirements, please contact us for clarification.
Passive Foreign Investment Company (PFIC)
Similarly, to adult US taxpayers, US children are also subject to the same penal tax regime if they invest in PFICs. This can be an issue when parents or other relatives set up ISAs for the child without being aware of the potential issues and filing requirements they will be subject to. For more information on PFICs please see our page.
Foreign Bank Account Report (FBAR)
Currently, the reporting threshold for US persons with foreign accounts is if the aggregate value of these foreign accounts exceeds $10,000 at any point during the year. This threshold does not have an age limit, meaning some US children may be required to file an FBAR each year.
Failure to report can result in severe consequences. If your child should have filed an FBAR in the past or is required to file one this year, please contact us.
Additional Child Tax Credit/Child Tax Credit (ACTC/CTC)
If a child qualifies as a dependent (as per the IRS definition), the parent or guardian can report them on their tax return. By doing so, the taxpayer may receive certain benefits associated with having a dependent.
If filing using foreign tax credits, the taxpayer may be eligible for the Child Tax Credit (CTC) or the Additional Child Tax Credit (ACTC). The CTC is a non-refundable credit of up to $2,000 per child that can offset US tax liability. If the taxpayer cannot use the full CTC, they may be able to claim the ACTC, which is a refundable credit. For US taxpayers abroad, the maximum ACTC available is $1,700 per child (TY 2024). US taxpayers abroad may therefore receive refunds each tax year due to having dependents.
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