US Child Tax Credit for Americans Living in Canada: FEIE Kills It

The US child tax credit (CTC) under IRC 24 provides up to $2,000 per qualifying child under 17, of which up to $1,700 (for 2025) is refundable as the additional child tax credit (ACTC). “Refundable” means you receive the credit even if your US tax liability is zero. For a US citizen in Canada with two children, that is $3,400 in cash from the IRS, annually, assuming the credit is fully available.

The credit is fully available if you use the foreign tax credit (FTC) to offset your US tax on Canadian income. It is completely unavailable if you use the foreign earned income exclusion (FEIE / Form 2555) to exclude your Canadian earnings, because the FEIE reduces your taxable income before the credit calculation, eliminating the earned income base that the refundable portion depends on.

This is one of the clearest reasons that FTC beats FEIE for Americans in Canada.

How the math works

FTC approach (keeps the CTC):

A US citizen in Ontario earns $100,000 CAD (~$73,500 USD) from employment. Married filing jointly with two children under 17.

1. US taxable income: approximately $73,500 minus standard deduction ($31,400 MFJ estimated) = $42,100
2. US federal tax on $42,100: approximately $4,700
3. FTC for Canadian tax paid: Canadian federal + Ontario tax on $100,000 CAD is approximately $18,000 CAD (~$13,200 USD). The FTC is limited to the US tax on the foreign-source income, but it easily covers the $4,700 of US tax. FTC applied: $4,700.
4. US tax after FTC: $0
5. Excess FTC: approximately $8,500 carries forward to future years
6. CTC: $2,000 x 2 = $4,000. Non-refundable portion reduces tax (already $0, so no effect). Refundable ACTC: up to $1,700 x 2 = $3,400.
7. Refund from IRS: $3,400

FEIE approach (loses the CTC):

Same facts. Using Form 2555 to exclude $130,000 of foreign earned income (2025 limit, more than covers the $73,500).

1. Foreign earned income excluded: $73,500
2. US taxable income: approximately $0 (all earned income excluded)
3. US federal tax: $0
4. CTC: the non-refundable portion has no tax to reduce. The refundable ACTC depends on earned income above $2,500, but excluded income under the FEIE is not “earned income” for the ACTC calculation.
5. Refund from IRS: $0

The difference: $3,400 per year. Over 17 years (the child’s eligibility period), that is $57,800 per child, $115,600 for two children.

Why the FEIE kills the refundable credit

The mechanism is in the statute. IRC 24(d)(1)(B)(i) calculates the refundable ACTC based on 15% of earned income in excess of $2,500. But IRC 32(c)(2)(A)(ii), which defines earned income for this purpose, excludes amounts excluded under IRC 911 (the FEIE). If you excluded your earned income under the FEIE, the earned income for the ACTC calculation is zero, and 15% of ($0 - $2,500) is $0.

The FTC does not have this interaction. The FTC reduces tax after it is calculated, leaving the earned income untouched. The ACTC calculation sees the full earned income, applies the 15% formula, and produces the refundable credit.

What about the non-refundable CTC?

The non-refundable portion of the CTC ($2,000 minus the ACTC amount) reduces your federal tax liability but cannot produce a refund. With the FTC approach, your tax liability is already zero (the FTC covers it), so the non-refundable CTC has nothing to reduce. You receive only the refundable ACTC ($1,700 per child).

With the FEIE approach, your tax liability is also zero (the exclusion eliminates it), and the non-refundable CTC also has nothing to reduce. The difference is that the refundable ACTC is available under FTC but not under FEIE.

What about the 2025 OBBBA changes?

The One Big Beautiful Bill Act (2025) made the TCJA tax rates permanent and increased the child tax credit. For 2025, the CTC is $2,000 per child with up to $1,700 refundable. Future legislative changes could increase the refundable amount further. Any increase in the CTC makes the FTC-vs-FEIE decision even more consequential: the larger the refundable credit, the more you lose by choosing the FEIE.

What if I already elected the FEIE?

If you have been using the FEIE (Form 2555) in prior years, you can revoke the election and switch to the FTC. However, once you revoke the FEIE, you cannot re-elect it for 5 years (IRC 911(e)). The revocation is for the current year and all future years (until you re-elect after 5 years).

For most Americans in Canada, the revocation is permanent in practice: the FTC is better in every year that Canadian rates exceed US rates (which is every year at most income levels). The 5-year lockout is irrelevant because you would not want to re-elect the FEIE anyway.

If you have been using the FEIE and have children, the CTC alone is usually a sufficient reason to switch to the FTC. The $3,400+ annual refund (for two children) exceeds any marginal benefit the FEIE might provide (there is none, in most cases, for US citizens in Canada, as explained in the FEIE vs FTC guide).

What should I do next?

If you are a US citizen in Canada with children under 17 and you have been using the FEIE, switch to the FTC on your next return. File the revocation of the FEIE election and use Form 1116 instead. Claim the CTC. If you have been on the FTC and already claiming the CTC, you are set. If you are unsure which method you have been using, check your most recent 1040 for Form 2555 (FEIE) or Form 1116 (FTC).

• FEIE or FTC? Why FTC usually wins in Canada, the full comparison
• Form 1116: why isn’t my FTC dollar for dollar?, the FTC mechanics
• I’m a dual US-Canada citizen. What do I file?, the full filing obligation picture
• I’ve never filed a US return from Canada, if you are catching up and can claim CTC on the streamlined returns

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.