How to Handle Taxes for a US Citizen Child Born Abroad

Stage 1: The Foundation (Birth to Year 1) - Your Proactive Setup Checklist

The foundation for a lifetime of compliance begins the moment your child is born, built on four non-negotiable pillars you establish in the first year. Your mission is critical: take decisive, one-time actions that eliminate future stress and establish predictable, confident management of your child's U.S. tax obligations.

• Establish Official Identity & Tax Status Immediately. Your first and most important task is to secure your child's legal identity as a U.S. citizen. Schedule an appointment at the nearest U.S. embassy or consulate to file for a Consular Report of Birth Abroad (CRBA), their official proof of citizenship. Crucially, you must complete and submit Form SS-5, the application for a Social Security number (SSN), at the very same appointment. The SSN is the central pillar of your child's financial life in the U.S. system—the key to being claimed as a dependent, qualifying for benefits like the Child Tax Credit, and eventually filing their own tax returns. Securing both at once is a crucial efficiency.
• Architect Your "FBAR-Ready" Banking System. As a global professional, you understand the importance of financial clarity. Open a separate, designated bank account for your child in your country of residence from day one. This is not merely for organization; it is a strategic move to simplify your Foreign Bank Account Report (FBAR) monitoring. All U.S. citizens, including minor children, must file an FBAR if the combined total of their foreign accounts exceeds $10,000 at any point during the year. By isolating your child’s funds, you create a crystal-clear boundary, transforming the annual FBAR check from a forensic accounting project into a simple, five-minute task.
• Create a "Gift Intake" Protocol. Well-meaning relatives, particularly in the U.S., can inadvertently create tax complications. Establish a clear protocol for how your child receives financial gifts. For 2024, any U.S. person giving a gift over $18,000 to a single individual may be required to file a gift tax return. Similarly, a large cash gift deposited into your child's foreign account could instantly trigger their FBAR filing requirement. Your protocol is not to refuse gifts, but to act as the informed "Family CFO"—requiring that you are consulted before any significant transfer happens so you can plan for compliance.
• Launch Your "Digital Vault" for Compliance Documents. From the moment you receive your child's official documents, create a single, secure digital folder in a cloud drive. This is your compliance vault. The very first files to scan and save are the CRBA and the Social Security card. This disciplined habit is a powerful tool in your arsenal. It dismantles the chaos of the "Year-End Tax Scramble," replacing it with a controlled process that ensures you always have what you need, exactly when you need it.

Stage 2: The System (Annually) - Your Ongoing Management Workflow

With that digital vault in place, you have eliminated the chaos of document hunting. Now you can shift from one-time setup to a calm, repeatable system for annual compliance. This workflow transforms U.S. tax obligations from a source of anxiety into a predictable, low-friction process, cementing your role as the confident Family CFO.

• Master the Filing Thresholds Decision Tree. Your child, as a U.S. citizen, only needs to file a tax return if their income surpasses specific thresholds. Use this simple decision tree each year. For 2024, your child must file a return if:

• Their unearned income (from interest or dividends) was over $1,300.
• Their earned income (from a job) was over $14,600.
• They had both types of income, and their gross income was more than the larger of either $1,300 or their total earned income (up to $14,150) plus $450.

This annual go/no-go checklist removes all ambiguity. A quick review of their accounts gives you a definitive answer.

• Run Your Annual FBAR & FATCA Check. This is your most critical annual risk-mitigation task. As part of your workflow, check the highest balance of your child’s foreign financial accounts during the calendar year.

• FBAR (FinCEN Form 114): If the aggregate value of all their foreign accounts exceeded $10,000 at any point during the year, you must file an FBAR. A common mistake is thinking this threshold applies per account; it is the combined total. There is no exception for age. The stakes are high. When you sign your own tax return, you are asked on Schedule B whether you have an interest in foreign accounts. According to Zhanna A. Ziering, a tax controversy attorney and Member at Ziering & Esman PLLC, "That precedent 'essentially makes a box checked on Schedule B almost a de facto presumption of willfulness.'" This underscores the importance of getting this right every single year.
• FATCA (Form 8938): If your child’s foreign assets are much larger, you may also have a filing requirement for the Foreign Account Tax Compliance Act (FATCA). For a U.S. citizen living abroad, this threshold is met if specified assets are worth more than $200,000 on the last day of the year or more than $300,000 at any point during the year. This form is filed with their U.S. tax return.

• Navigate the "Kiddie Tax" Minefield. Should your child’s investment portfolio perform well, be aware of the "Kiddie Tax." This rule prevents families from shifting investment income to children to take advantage of their lower tax rates. For 2024, if your child's unearned income exceeds $2,600, the excess is taxed at your higher, parental marginal rate. Your annual system should be to monitor this specific threshold. If their investment income approaches this level, it signals a need to consult your financial advisor on more tax-efficient strategies.
• Strategically Choose Between the FTC and FEIE. If your child has foreign earned income—perhaps from a teenage summer job—you must choose how to avoid double taxation. The two primary tools are the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). While the FEIE is straightforward, it comes with a significant trade-off: using it makes you ineligible to claim the refundable Additional Child Tax Credit (ACTC). The FTC, while requiring more paperwork (Form 1116), often provides a greater financial benefit precisely because it preserves eligibility for this valuable credit. Your annual system must include a deliberate analysis of which method best serves your family's complete financial picture.

Stage 3: The Strategy (Long-Term) - Optimizing Your Child's Financial Future

This deliberate, annual system transforms tax compliance from a source of dread into a controlled process. With this foundation, you can elevate your role from annual manager to true Family CFO. Your focus shifts from doing tasks to making strategic decisions—choices that will profoundly shape your child's financial independence, minimize future tax burdens, and empower them to take ownership of their unique financial life.

• Model the Impact of U.S. vs. Foreign College Savings Plans. Saving for higher education is a universal goal, but for an expat family, the choice of vehicle has complex cross-border implications. A U.S. 529 plan offers tax-free growth from a U.S. perspective, but contributions are unlikely to be deductible where you reside. Conversely, a local savings plan might offer tax benefits where you live, but its earnings are generally taxable by the IRS and the account is subject to FBAR and FATCA reporting. Your strategic task is to model both scenarios, projecting future tuition costs against the long-term tax drag of each option to find the optimal path.
• Plan for the "First Job" Transition. The day your child earns their first significant paycheck is a major milestone and the moment their tax situation evolves. Your long-term strategy is to prepare them for this transition before it happens. This involves education, not just instruction. Schedule a conversation to explain why, as a U.S. citizen, they have a lifelong filing obligation. Walk them through the concepts of earned income, the FBAR, and the choice between the FEIE and FTC. You are transitioning them from a passive line-item to an active, educated participant in their own financial life.
• Structure Investments to Minimize the "Kiddie Tax" Impact. As your child's accounts grow, the "Kiddie Tax" becomes a strategic challenge. As the Family CFO, you can proactively structure their portfolio to mitigate its impact by managing their unearned income. Consider prioritizing investments that favor long-term growth over those that generate significant annual income.

• Growth-Oriented Assets: Investing in growth stocks or funds that pay minimal dividends can keep annual unearned income below the tax threshold.
• Tax-Deferred Vehicles: U.S. Savings Bonds or other instruments that defer income recognition can be effective tools to delay the tax event until your child is older.
• Tax-Exempt Bonds: For a conservative approach, municipal bonds can generate income that is often exempt from federal tax entirely.

• Evaluate the Long-Term Citizenship Question. This is a sensitive but essential part of a comprehensive strategy for a child who may never reside in the United States. A responsible Family CFO understands the future landscape. As they approach adulthood, your child will inherit both the benefits and the burdens of U.S. citizenship. Your role is to ensure they can make an informed choice. This means understanding the process of renunciation: an irreversible act involving an in-person oath at a U.S. embassy, a significant government fee (currently $2,350), and potential "Exit Tax" implications for high-net-worth individuals. Your strategy isn't to make this decision for them, but to be aware of the facts so you can provide objective guidance if they ask.

Your Role as the Family CFO: From Anxiety to Agency

Answering individual questions, while essential, can feel like a game of whack-a-mole. This reactive approach leads directly to compliance anxiety. The solution is to stop managing a chaotic list of rules and instead adopt the operational framework of a "Family CFO." You already possess the required skillset; it's a matter of applying the same strategic rigor you use in your career to your child's U.S. tax situation. This shift in mindset transforms the challenge from a source of anxiety into a system that provides clarity, confidence, and control.

This brief has been structured to build your Family CFO system, which rests on three pillars:

• A Bulletproof Foundation: In Stage 1, you secured the CRBA and SSN, architected a separate banking system to simplify FBAR tracking, and established a protocol for financial gifts. You established order from the start.
• A Repeatable Annual System: In Stage 2, you created a predictable workflow. You check filing thresholds, verify FBAR and FATCA exposure, assess the "Kiddie Tax" impact, and strategically choose the right tool—like the FTC—to maximize benefits such as the Child Tax Credit.
• A Forward-Looking Strategy: In Stage 3, you elevated your role from manager to strategist. You proactively model college savings vehicles, structure investments to minimize tax drag, and prepare your child to become an educated participant in their own financial life.

For an expat family, this framework is your most powerful asset. It converts the abstract complexities of the U.S. tax code into a concrete, manageable process. You move from a position of uncertainty to one of agency. By implementing this three-part system, you are not merely ensuring your child avoids penalties. You are building the foundation of their financial literacy and securing a future of opportunity, all with the calm confidence you bring to every other professional challenge you master.