What if you messed up and claimed the foreign income exclusion by mistake?

What if you messed up and claimed the foreign income exclusion by mistake, and it was detrimental to the outcome of your refund?

The foreign income exclusion is a very well known mechanism used by expats to reduce their US income tax liability. It's much more well known to taxpayers than the foreign tax credit, and it's also easier to prepare the form (IRS Form 2555).

However, utilizing the foreign income exclusion will cause income-based credits to be disallowed. For instance, the refundable child tax credit was created to encourage people to work. Parents can receive up to 15% of their income back as a refund (depending on their income and number of children).

Utilizing the foreign income exclusion will cause this income to be considered basically "non-existent" or excluded, causing the refundable child tax credit to be denied. This is a common mistake people make when they DIY their returns, and surprisingly even some tax accountants get confused about this point.

This mistake can be fixed up with an amended tax return. You can even file up to 3 years back to claim the refunds you deserve. To minimize tax liability, the foreign tax credit can be utilized instead, if applicable. Sometimes even if the foreign tax credit is unavailable, such as if the country of residence has no income tax, it will still be worthwhile to file without the foreign income exclusion.

Amended returns can be quite complex, so it would be advisable that non-tax professionals don't try preparing it on their own - or else they may need an amended return to the amended return - a real headache!