November 29, 2016

Earned Income Credit for Foreign Missionaries

Question:

A missionary couple (and their children) lives overseas for over half the year, while maintaining a home in the U.S.  Both are US citizens.  Do they qualify for the Earned Income Credit?

Answer: 

First, there are three potential credits that could be affected by residency status.
  • Earned Income Credit (EIC) (refundable) - See IRS Publication 596
  • Child Tax Credit (non-refundable) - Up to $1,000 per qualifying child
  • Additional Child Tax Credit (refundable) - This credit is for certain individuals who get less than the full amount of the child tax credit.
If the taxpayer did not live with his child in the United States for at least six months of the tax year, he cannot claim the EIC.

But a taxpayer may be able to claim the Child Tax Credit or the Additional Child Tax Credit even though he did not live in the United States at least six months of the current tax year.

It is often advantageous for a foreign missionary to claim a Foreign Earned Income Exclusion using Form 2555, thereby excluding some or all of his earned income from taxation. IRS Publication 596 and Publication 972 state that the Additional Child Tax Credit cannot be claimed if one files Form 2555 or Form 2555-EZ. 

For a missionary paying foreign taxes in a foreign country, he may reduce or eliminate his income tax by claiming the Foreign Tax Credit instead of the Foreign Earned Income Exclusion. With the combination of a minister's housing allowance, education credits, and the Form 1116 Foreign Tax Credit, a missionary may qualify for the Additional Child Tax Credit and be able to reduce or eliminate his income tax.



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