The US taxes its citizens on worldwide income, regardless of where they live. This means that even if all your income is earned in Israel and taxed under Israeli law, you’re still required to file an annual US tax return. If you’re a US citizen raising children in Israel, you’re probably already aware that the Child Tax Credit can reduce your US tax liability. What many taxpayers don’t realize is that the way you file from abroad plays a major role in whether you receive the full benefit, including the refundable portion.
How the Child Tax Credit works
The exact amount of the Child Tax Credit changes from year to year. In 2025, it is projected to provide up to $2,200 per qualifying child, with up to $1,700 potentially refundable through the Additional Child Tax Credit. The actual amount received is dependent on income and number of children, and there is a cap, so a low income family with many children may not receive the maximum refund per child.
To qualify, each child must:
- Be under age 17 at the end of the tax year
- Have a valid US Social Security Number issued by the filing deadline
- Meet standard IRS dependency requirements (residing more than 50% of the time with you, but no requirement of US residency)
How to get the credit
The most common reason US citizens abroad lose eligibility for the refundable portion of the credit is because they use the Foreign Earned Income Exclusion (FEIE).
The FEIE (Form 2555) allows you to exclude a significant amount of foreign earned income from your US return. However, if you claim the FEIE, you cannot receive the refundable portion of the Child Tax Credit (ACTC), although you will receive the non-refundable credit.
This is a critical detail. Many families unknowingly choose the FEIE because it seems simpler, not realizing it disqualifies them from potentially thousands of dollars in refundable credits.
Instead of excluding income with the FEIE, you can elect to use the Foreign Tax Credit (FTC) on Form 1116. The FTC gives you credit for income taxes paid to Israel.
For many Israeli residents, especially those paying standard Israeli income tax rates, the FTC is sufficient to reduce US tax liability to zero. And unlike the FEIE, using the FTC keeps you eligible for the refundable Child Tax Credit.
This strategy often results in a meaningful refund for families with qualifying children.
Please note that there are other considerations besides the Additional Child Tax Credit to take into account when deciding whether to use the Foreign Earned Income Exclusion, so it’s best to consult with a CPA who specializes in tax filing for American expats in Israel.
Why to use an accountant
The IRS has increased its review of returns claiming refundable credits for taxpayers living abroad. Errors, especially improper use of the FEIE, can lead to delays, audits or ineligibility in future years. Accurate filing and proper documentation are essential. Working with an accountant who specializes in expat taxes can help ensure that you maximize your benefits, avoid common mistakes and maintain compliance with both US and Israeli tax laws. They can also help you evaluate whether using the Foreign Tax Credit instead of the FEIE will provide the best outcome for your family.
US citizens living in Israel have the opportunity to benefit from the Child Tax Credit, but maximizing that benefit requires careful planning. Make sure your children have valid SSNs by the filing deadline, since eligibility for the full credit depends on it. Be aware that claiming the FEIE disqualifies you from the refundable portion of the credit while using the Foreign Tax Credit instead can often result in a better outcome. Filing from Israel involves additional forms, reporting requirements and strategic decisions, so taking the time to understand your options and getting expert advice is essential for optimizing your refund.
This article was prepared with the assistance of Ely Cole, CPA, Partner, Cole & Waxman Tax Services.
