TL;DR: What is the "order of operations" for tax credits? Is FTC applied to "tax owed" first, or CTC/ACTC?
So, I became a Japanese citizen about a year ago, and I was finally trying to get caught up with my tax returns in order to relinquish US citizenship and close the book on that part of my life.
I did 5 years of tax returns on my own using the FEIE. Then I dug a bit deeper on this sub and others and learned about the Additional Child Tax Credit (ACTC) being refundable if you use FTC instead of FEIE.
So, in order to try to get some nice refunds to help recoup the exorbitant fee I just paid to relinquish my citizenship, I decided to amend three years of tax returns to change from FEIE to FTC. I chose to amend only three years because I read you won't get refunds for anything further back than that.
I did it on paper, all by myself. I calculated my tax owed, and covered it with FTC from taxes in Japan (income tax and residence tax) and used CTC (the non-refundable child tax credit) to cover what FTC didn't. I calculated that I'd get almost all of the ACTC back in 2022, and all of it should come back for 2023 and 2024. This totaled over $4600. I double, triple checked that I did the math and the forms correctly.
Fast forward four months. I got one check from the IRS for 2024 for just over $300. Then just yesterday, I got four letters. Each letter said they "made the changes" as I requested but it was much different from what I calculated. It's like they had completely ignored that I covered my tax with FTC/CTC, and they just applied the ACTC to cover it. So the refund for 2024 was just the difference between "tax owed" and the ACTC, leaving it significantly smaller than the full $1700 (only around $300).
2023 did come out with the full $1600 refund according to the letter (I did not need to use CTC this time, only FTC, if that makes a difference) but the 2022 letter said they used most of that to pay tax I owed, penalties, and interest from 2022! In 2022, I calculated 0 tax owed and about a $1300 refund. Again, it's like they were entirely overlooking the FTC and just trying to apply my ACTC to the tax, and then penalizing me for a late tax payment that should have been zero to begin with.
So my calculated $4600 refund will be around $700 total.
So I am wondering, is this how it's supposed to work? One thing I read said that refundable credits are applied first in order to minimize tax refunds, and non-refundable FTC are applied after, so I'm just getting less because FTC couldn't cover my entire owed tax in 2022 and 2024, and because I've only got one kid? Or is it a mistake and should I call?
I guess $700 is better than the $0 I would have gotten with FEIE, anyway. Thanks if you read this far. If anyone has any idea what's going on, I'd like to hear it!
by Calculusshitteru