When COVID-19 hit, it posed an additional challenge for US expats who were temporarily in the US for business or personal reasons. Many became stranded in the US due to restrictions on international travel, borders closing, or local COVID-19 conditions. This left them scrambling to work out longer-term accommodations in the US, support and logistics for family members back at home, and more.
Although the last thing these expats needed to worry about was taxes, being stranded in the US also threatened to disqualify them from being able to claim the Foreign Earned Income Exclusion on their US 2020 tax returns.
The Foreign Earned Income Exclusion (FEIE) and associated Foreign Earned Housing Exclusion are important tax breaks for US citizens and residents living overseas. They are one mechanism to combat the double taxation that happens when their income is taxed by both the US and the country in which they live. They also help offset costs and compensate for the fact that many expats are not using US taxpayer-funded services while abroad. The exclusions allow them to shield up more than $100,000 per year of employment income or other “earned” income from US taxes.
US expats can qualify for the FEIE in two ways:
- The Bona Fide Residence (BFR) test, which takes into account various facts and circumstances, and
- The Physical Presence Test (PPT), which takes into account the number of days an expat spends abroad vs. in the US (among other factors). The PPT is often referred to as the 330-day rule (for the number of days an expat needs to stay outside the US in 12 months to qualify).
Many expats know one PPT rule by heart: do not spend more than 35 days in the US (for any reason) during a 365-day period. COVID-19 threatened that. By being stranded temporarily back in the US due to COVID-19, expats risked exceeding the 35 days and losing their ability to claim the Foreign Earned Income Exclusion under the PPT.
Fortunately, the US Internal Revenue Service (IRS) recently issued Revenue Procedure 2020-27 to grant tax relief to US expats in this situation. The relief applies to US tax residents who have established residency in a foreign jurisdiction, have departed their foreign jurisdiction, and are unable to return to their foreign jurisdiction due to COVID-19.
This new procedure allows eligible expats to waive the time obligations (i.e., the limit of 35 days in the US) of Internal Revenue Code Section 911, the tax code section for the Foreign Earned Income Exclusion.
To meet this exception, an expat:
- Must have established residency or been physically present in the foreign jurisdiction before the beginning date in the “qualifying period” (defined below), and
- Must have reasonably expected to be present in the foreign jurisdiction for 330 days within any 12 months but for the COVID-19 emergency.
The “qualifying period” is as follows:
- The People’s Republic of China – Beginning on December 1, 2019
- Rest of the world – Beginning on February 1, 2020
- Period Ending – July 15, 2020 (may be extended)
If an individual meets these requirements, then Revenue Procedure 2020-27 indicates that the days spent in the US during this qualifying period will be counted as non-US days for the purposes of the Foreign Earned Income Exclusion under both qualifying tests, BFR and PPT.
The Wolf Group has been providing international income tax planning services since 1983 and can assist US expats in claiming tax treaty and expat benefits, determining the most advantageous filing positions, confirming US tax return filing requirements and foreign asset reporting requirements, and understanding the applicability of these COVID-19-related provisions. Learn more here.