President Biden is expected to sign the American Rescue Plan Act of 2021 into law on March 12, 2021. After much back and forth between the House and Senate, the $1.9 trillion rescue package includes some key provisions for Americans living abroad. We break it down here.
Q: Will Americans living abroad get the third stimulus payment?
A: Yes! The payment is based on your adjusted gross income. Individuals with an Adjusted Gross Income of up to $75,000 and couples with up to $150,000 will receive the full direct payment of $1,400. An additional $1,400 per dependent claimed on the tax return will also be given. Individuals with an income between $75,000 and $80,000 will receive a prorated lesser payment, as will couples with an AGI between $150,000 and $160,000.
Q: How does the Foreign Earned Income Exclusion affect the stimulus calculation?
A: If you use the FEIE, your adjusted gross income is reduced by the exclusion amount. This means that you could qualify for the stimulus payment based on your AGI, even if you real income is much higher. Look at line 8b of your 2019 tax return or Line 11 of your 2020 tax return. This feels like an oversight on the part of Congress, but we will take it!
Q: Which tax year is the third stimulus based on?
A: It depends how fast the Treasury will act to start getting the payments out. If you’ve not yet filed 2020, it may be based on your 2019 return. If your income went down in 2020, you should file as soon as possible to get your new AGI recorded for the calculation. Your return must be e-filed to get it processed quickly, although it may already be too late to update. If you miss out on some of the credit because your 2019 return is used, you will have the opportunity to receive the rest as a refund on your 2021 taxes.
Q: The IRS doesn’t have my bank information. What can I do?
A: You can add your direct deposit information to your 2020 tax return if you plan to file right away. If you don’t owe tax, you can trick the system by first making a small ($10) 2020 estimated tax payment at www.irs.gov and then claiming that payment as an overpayment on your 2020 return. That will generate a refund. The IRS may also open back up their portal to submit bank information.
Q: What if I don’t have a US based bank account, will I get a check?
A: You may get a check or a debit card. Another method is to open an account with Wise. We’ve discussed the steps in our blog.
Q: How does the new child tax credit work?
A: The bill expands the child tax credit to $3,600 for children under age 6 and $3,000 for children age 6 to 17. The credit amount decreases for individuals with a modified AGI over $75,000 or couples over $150,000. Note that this is based on the modified AGI, which adds back in the foreign earned income exclusion. The credit is fully refundable, meaning you may be able to receive it even if you don’t owe any tax.
However, it’s important to note that the expanded child tax credit is only fully refundable for taxpayers with a principle place of abode in the United States for more than half of the tax year, or for taxpayers who are bona fide residents of Puerto Rico for the tax year.
Expats may not be eligible for the refund of the expanded child tax credit amount, but the increased amount can still be used to reduce tax that you owe. For example if you are entitled to the expanded child tax credit but you live outside of the United States for more than half of the year, you’ll be entitled to a $3,600 or $3,000 credit depending on your qualifying child’s age, but only $1,400 of that will be refundable.
Q: Is there an income requirement for the new child tax credit?
A: No. The new credit eliminates the requirement to have at least $2,500 which applies to the traditional child tax credit. This might mean that taxpayers who typically don’t get the child tax credit because of the foreign earned income exclusion might be able to get the credit. We are waiting for IRS guidance to see how this credit will be calculated.
Q: When will I receive the new child tax credit?
A: This is a 2021 tax credit. Taxpayers may start to receive an advance of up to half of the 2021 credit as direct payments during the year 2021. We don’t yet know if the payments will be monthly or quarterly, but we expect them to start in July.
Q: What if I qualify for the traditional child tax credit but not for the expanded credit due to income limitations?
A: You can still claim the traditional child tax credit if your income is too high for the expanded credit.
Q: Do my kids need to have social security numbers for the child tax credit?
A: Yes. Your dependents must have social security numbers by the due date of your 2021 tax return (including extension) to get the expanded child tax credit. If you aren’t receiving the period direct payments, you can still collect the child tax credit when you file your 2021 tax return as long as your dependents have social security numbers. If you are having a hard time obtaining the SSN because of Covid closures, you can file an extension to give yourself more time.
Q: Are business provisions like the PPP loan program available to expats with self-employment income?
A: No. The place of residence of the self-employed person must be within the United States to take a PPP loan. If you have a domestic S Corp or LLC, your business may qualify for a PPP loan.
Q: If I collect unemployment from my country of residence, will the income be tax free?
A: Yes. There is no exclusion of foreign unemployment income from the text of the suspension of tax on unemployment compensation. Unemployment income of up to $10,200 will not be taxable for taxpayers with an adjusted gross income of less than $150,000.