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Free money on tap for green card holders and U.S. citizens

The other day, my two-year-old son Michael was running around the house with our dog Ginger chasing him. Ginger had about an inch of his pants between her teeth.

"Puppy eat me!" he was shouting and laughing.

What would cause our mild-mannered puppy to attempt to swallow my son's pants? I wondered. After a little investigation, I discovered that Michael had stuffed his pockets with dog food. That'll do it.

After removing the dog food, I discovered that Michael also had two pockets full of loose change. He had robbed his brother's piggy bank. One thing about Michael, even at the age of two he knows the value of a penny. To him, having a pocket full of free money is better than candy.

If you'd like a little free money yourself this tax season, and you're a U.S. citizen or green card holder, I've got an idea for you.

This idea is courtesy of Kevyn Nightingale, a cross-border tax specialist and founder of International Tax Services Group in Toronto.

The idea

It's estimated that there are hundreds of thousands of Canadians who are also U.S. citizens or green card holders. If you're in this boat, you probably don't file a U.S. tax return annually, although you should. Now there's an even greater incentive to file.

You see, the U.S. government introduced a tax credit in 2001 that could mean cash in your pocket if you qualify, and file a U.S. tax return.

I'm talking about an "additional child tax credit," and it's refundable, which means that even if you don't owe any tax, the U.S. government will cut you a cheque for the amount of this credit.

The credit was initially set at $500 (U.S.), but was increased to $600 in 2002, and $1,000 in 2003. To be entitled to the credit, your child must have been under age 17 at the end of the year and be a U.S. citizen or resident (a green card holder living in Canada is considered to be a U.S. resident for tax purposes).

"Interestingly, as a parent, you don't have to be a U.S. citizen or resident to get the credit," Mr. Nightingale says. "But you do have to file a U.S. tax return and must report earned income over $10,750," he says.

According to Mr. Nightingale, the credit will be reduced as your income exceeds a threshold based on your filing status. For a couple using the "married filing jointly" status, the threshold begins at $110,000 of joint income. A family with two qualifying kids still gets some of the credit if their joint income is below $150,000.

The catch

There's a catch here. If you file a U.S. tax return, you're probably used to claiming the Foreign Earned Income Exclusion (FEIE), which shelters up to $80,000 of wages or business income from tax and is generally available to U.S. citizens or green card holders living outside of the United States.

The problem? If you claim the FEIE, the excluded income is not considered to be "earned income" for the purpose of this tax credit. Mr. Nightingale has a solution. "File your U.S. tax return without the FEIE," he says. "In most cases, you'll still pay no U.S. tax because you can use foreign tax credits instead. It's more complicated, but this approach will get you the refund," he says.

And if you missed the credit for 2001, 2002 or 2003, you still have time to file an amended U.S. tax return using U.S. Form 1040X. Mr. Nightingale can be reached through his website at

Tim Cestnick, FCA, CPA, CFP, TEP is author of Winning the Tax Game 2005 and The Tax Freedom Zone.

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