Child Tax Credit for Israeli-Americans - Why You're Probably Losing $1,700 Per Child

A US citizen living in Israel with a child holding an SSN is eligible to receive up to $1,700 per child from the US every year. The refund is called the Additional Child Tax Credit ⁦(ACTC)⁩, and it's part of a total Child Tax Credit of $2,200 per child under the 2025 tax update. The refund is in cash - you receive it even if you owe no US tax. But there's a small detail that causes most Israeli-Americans to lose this entire amount, without even knowing.

The trap: FEIE that wipes out the taxable income

Most Israeli-Americans filing a US tax return use FEIE ⁦(Foreign Earned Income Exclusion, Form 2555)⁩ - excluding Israeli employment income from the return, up to a ceiling of about $130,000 a year. It's popular because it's simple and brings the tax liability to zero. But it creates a serious problem: the ACTC formula is 15% × ⁦(earned income minus $2,500)⁩. If FEIE removes all earned income from the return - earned income for the calculation is zero, and the refund becomes zero.

The concrete example

An Israeli-American family, father works in tech with a salary of 400,000 NIS (≈ $110,000), two children with SSNs. If he uses FEIE - calculated income is 0, ACTC is 0, refund is 0. He has lost $3,400 for the year. Across the 10 years of raising the children, that's $34,000 he could have received.

The solution: switch to the Foreign Tax Credit ⁦(FTC)⁩

Instead of FEIE, you can use the FTC ⁦(Foreign Tax Credit, Form 1116)⁩. The FTC offsets the tax you pay in Israel against the US tax - but the income stays on the return. That means: earned income for the ACTC calculation is the actual income, and the refund becomes fully available. For most Israeli-Americans, Israeli tax is higher than what they would owe in the US on the same income - so FTC offsets the entire liability and, in the same move, unlocks eligibility for the refund.

Who benefits most from switching

• Employed families with one or more children holding SSN
• Annual income below $400,000 ⁦(married couple)⁩ or $200,000 ⁦(single)⁩ - above this the CTC phases out
• Anyone paying higher Israeli tax than they would in the US ⁦(nearly every employee)⁩
• Families with an Israeli spouse - usually MFS ⁦(Married Filing Separately)⁩ beats MFJ

Eligibility conditions

• Child has a valid SSN from the embassy, before the return's filing date ⁦(including extensions)⁩
• US-citizen parent has SSN ⁦(not ITIN)⁩
• Child is under age 17 at end of tax year
• Child lives with you most of the year and qualifies as a dependent

Special case: Israeli spouse who is not a US citizen

If only one spouse is a US citizen - there are two filing options. The default is MFS - the US spouse files alone, the Israeli spouse's income doesn't enter the return. The second is MFJ with a §6013⁦(g)⁩ election - the Israeli spouse gets an ITIN and all couple income becomes US-taxable. For most Israeli families MFS is better - preserves CTC eligibility without exposing the Israeli spouse to US tax.

Retroactive refunds

If you've used FEIE in recent years and lost the CTC - you can file an Amended Return ⁦(Form 1040-X)⁩ for up to 3 years back and receive the refunds. For a family with 2 children that's up to $10,200 due to you.

First step

We work in partnership with licensed US CPAs who specialize in these cases. If you file a US return with FEIE and you have children with SSNs - it's worth a review. We'll go through your specific case and tell you whether switching to FTC is worthwhile, and how much money it may return to you this year and in prior years.