5 Strategic Moves to Offset the 2026 Child Tax Credit Reduction

Maximizing the Foreign Tax Credit (FTC) vs. Foreign Earned Income Exclusion (FEIE)

For our cross-border clients living in Canada or abroad, the Child Tax Credit presents a unique challenge. To claim the CTC, a taxpayer must have "taxable income" after exclusions. Many expats use Form 2555 to claim the Foreign Earned Income Exclusion (FEIE), which allows them to exclude up to $126,500 (2024 limit) from US taxation. However, as IRS Publication 54 clarifies, you cannot claim the refundable portion of the Child Tax Credit if you elect to exclude any amount of foreign earned income.

With the credit reduction looming, our team often recommends switching from the FEIE to the Foreign Tax Credit (FTC) via Form 1116. Because Canadian tax rates are generally higher than US federal rates, families can often use the taxes paid to the Canada Revenue Agency (CRA) to wipe out their US tax liability while remaining eligible for the Child Tax Credit.

Strategy	CTC Eligibility	2026 Impact
FEIE (Form 2555)	Limited/None (Refundable part)	Higher tax due to lost credit
FTC (Form 1116)	Full Eligibility	Offsets higher 2026 brackets

According to FinCEN data, cross-border compliance is tightening, with over 1.5 million FBAR (Report of Foreign Bank and Financial Accounts) filings recorded annually. Ensuring that your CTC strategy doesn't trigger red flags in your FBAR or Form 8938 (FATCA) reporting is a cornerstone of our compliance methodology at Zenith.

Source: FinCEN.gov

Income Shifting and Business Structuring for Self-Employed Parents

If you are a small business owner, the sunset of the TCJA doesn't just affect your family credits; it also threatens the Section 199A Qualified Business Income (QBI) deduction. This 20% deduction for pass-through entities is also set to expire. To offset the loss of the $1,000 per-child credit, we look toward "income shifting" strategies.

By hiring your children to work in your business, you can shift income from your high marginal tax bracket (which is scheduled to rise—the 22% bracket returns to 25%, and the 24% to 28% in 2026) to the child’s lower or zero-percent bracket. Under IRS Revenue Manual guidelines, a child can earn up to the standard deduction ($14,600 in 2024) tax-free.

"The key to income shifting is documentation," our lead advisors often remind clients. "The work must be age-appropriate, the pay must be reasonable for the services rendered, and you must issue a Form W-2." This effectively keeps more money in the family unit, helping to bridge the gap left by the reduced Child Tax Credit. Furthermore, for cross-border business owners, we must ensure these wages are recognized as legitimate expenses by both the IRS and the CRA to avoid double taxation.

Source: Canada.ca

Accelerating Educational Savings and 529 Plan Contributions

As tax brackets rise in 2026, the value of tax-advantaged growth increases. One of the most effective moves to preserve family wealth during a period of higher taxation is the front-loading of 529 College Savings Plans. While 529 contributions are not deductible on federal taxes, the growth and withdrawals for qualified education expenses are tax-free.

In 2024, the IRS allows for "superfunding" 529 plans by utilizing five years' worth of gift tax exclusions at once. This allows a married couple to contribute up to $180,000 per child in a single year without triggering gift tax, provided they file Form 709. Per Treasury Department data, the utilization of 529 plans has grown by 25% over the last decade as parents seek to hedge against rising tuition and taxes.

For our Canadian residents with US tax obligations, we must be cautious. The CRA does not recognize the tax-free status of a 529 plan, often viewing it as a foreign trust. In these cases, we pivot our strategy toward Registered Education Savings Plans (RESPs) and utilize the Canada Education Savings Grant (CESG), while carefully managing the US reporting requirements under Form 3520 to avoid punitive penalties.

Strategic Roth Conversions Before Brackets Rise

The 2026 sunset isn't just about the Child Tax Credit; it’s a total recalibration of the tax code. According to the IRS, the current 2024 tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. In 2026, these are set to shift to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

For families in the current 22% or 24% brackets, a Roth Conversion before the end of 2025 is a powerful move. By converting traditional IRA funds to a Roth IRA now, you pay the tax at the lower current rates. This reduces your future Required Minimum Distributions (RMDs) and provides a tax-free inheritance for your children.

At Zenith, we model these conversions to ensure they don't inadvertently push you into a higher phase-out range for the current $2,000 Child Tax Credit. It is a delicate balance: maximizing today’s lower rates while ensuring you don't trigger the $400,000 phase-out threshold that would negate the benefit of the conversion.

Source: IRS Rev. Proc. 2023-34

Common Mistakes to Avoid

• Ignoring the Phase-out Cliff: Assuming you will still get the credit in 2026 if your income is over $110,000. Many "middle-class" families will be priced out of the credit entirely.
• Mismanaging the FEIE/FTC Switch: Switching to FTC without calculating the impact on your Canadian foreign tax credits or carryforwards. This requires a multi-year projection.
• Failing to Document "Child Labor": Hiring your kids but failing to keep a timesheet or pay a market rate, leading to IRS audits and disallowed deductions.
• Overlooking the FBAR Threshold: As you move money to offset taxes, remember that the $10,000 aggregate threshold for foreign accounts remains strict. Failure to file can result in penalties exceeding $10,000 per violation.

Frequently Asked Questions

Will Congress extend the $2,000 Child Tax Credit?

While there is bipartisan support for the CTC, no extension has been passed. We advise clients to plan for the sunset and adjust if the law changes, rather than hoping for a last-minute legislative fix.

Can I still claim the CTC if I live in Canada?

Yes, but your children must have a US Social Security Number (SSN). Children with only an ITIN no longer qualify for the CTC under the TCJA, and this requirement is expected to remain post-2025.

How does the 2026 change affect the Credit for Other Dependents?

The $500 non-refundable credit for older children (17-18 or students up to 24) is also part of the TCJA. Its future is uncertain, but it may also revert or be eliminated, further increasing the tax burden on families with college-aged children.

What is the "refundable" part of the credit?

Currently, up to $1,700 (adjusted for inflation) of the $2,000 credit is refundable, meaning you get it back even if you owe zero tax. After 2025, the refundable portion is scheduled to revert to a lower calculation based on 15% of earned income above $3,000.