Tax free Roth conversions using the child tax credit and foreign exclusion

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
curryitr
Posts: 67
Joined: Fri Jan 04, 2019 8:29 am

Tax free Roth conversions using the child tax credit and foreign exclusion

Post by curryitr »

Hello,

I’m an Expat claiming the FEIE, and since all our earned income is excluded I have been using our standard deduction to convert our Traditional IRAs to Roth. My understanding is that the FEIE prevents us from claiming the refundable part of the CTC, also known as the Additional Child Tax Credit because we don’t have earned income. I have a couple questions related to this assuming we have 1 qualifying child:

1. Even if we can’t get a refund, could we have additional conversions or investment income over and above our standard deduction, causing us to owe taxes, and then claim the non-refundable part of the Child Tax Credit to offset them?

The way our contract works is that we are overseas for 3 to 4 years and then back in the States for one year. For the year that we are in the States our employer doesn’t withhold taxes unless we request it. My calculation is that if we claim the CTC the year we are in the States, (not using the FEIE) we probably wouldn’t need to withhold anything. Our W2 income hovers around $60,000 so after our standard deduction and 2x Traditional IRA contributions our taxable income will be around $23,000. Taxes at the current rates would be around $2,400ish, less the $2,000 CTC and a few hundred for the Retirement Savers Credit and we should owe at most a few hundred in taxes.

2. Does this mean we wouldn’t need to do any withholding on those years in the States? I would hate to get hit with IRS penalties for under withholding but it doesn’t look like it will be a problem from what I’m seeing.

Thanks!
Last edited by curryitr on Thu Feb 25, 2021 1:49 pm, edited 1 time in total.
Topic Author
curryitr
Posts: 67
Joined: Fri Jan 04, 2019 8:29 am

Re: Claiming the CTC and FEIE for tax free Roth Conversions

Post by curryitr »

Basically my main question boils down to if it’s possible to use the Child Tax Credit to offset taxes from passive income and conversions when you don’t have any earned income due to the FEIE?
Topic Author
curryitr
Posts: 67
Joined: Fri Jan 04, 2019 8:29 am

Re: Tax free Roth conversions using the child tax credit and foreign exclusion

Post by curryitr »

Just checking in again to see if anyone has an idea how the FEIE and child tax credit would work together in this scenario.
baulrich
Posts: 1
Joined: Wed Jan 08, 2020 3:38 pm

Re: Tax free Roth conversions using the child tax credit and foreign exclusion

Post by baulrich »

I believe that the point of your question is moot, at least for tax year 2021, since the CTC for that year will be fully refundable regardless. Although I'm guessing you asked it regarding your 2020 taxes.

I don't have any knowledge of how FEIE affects the refundable nature of the CTC for tax years 2020 and prior. I can confirm that TY2020 and before the refundable nature of the CTC DID provide "space" for fairly large Roth Conversion to be done at a marginal rate of 0%, assuming little/no other earned income. (Note that this strategy/effect is negated IF there is any significant earned income, because then the earned income credit, which is also magnified by children on the return, is in play, but then "lost" due to the Roth Conversions of any significant size.)

Again, I think it doesn't matter for 2021, but it should not be hard to test your question with tax software for year 2020. After you run your base scenario, you should be able to tinker to find what kind of "space" you have for Roth Conversions at the marginal rate you desire. Let us know what you found out, because - for now - the CTC is "always refundable" for 2021 only, then reverts to rules.
Post Reply