Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE). In addition they may be able to exclude certain amounts paid for foreign housing using the Foreign Housing Exclusion (FHE). Both of these benefits are governed by Code Section 911. In this post, the FEIE and FHE benefits are collectively called “FEIE Benefits”.
The COVID-19 Emergency may have caused some expatriates to return to the United States involuntarily, thus impacting their ability to claim the FEIE Benefits. Before explaining how the Internal Revenue Service (IRS) just rescued this situation, here is a bit of background on how the rules work.
The FEIE amount is adjusted annually for inflation. The amount for 2020 is US$107,600. The FHE is in addition to the FEIE and is available for certain amounts of overseas “housing expenses” paid or reimbursed by an employer. Allowable housing expenses are the reasonable expenses paid for foreign housing. Reasonable housing expenses include such items as rent, utilities (not including telephone charges), and real and personal property insurance. The expenses must actually be paid or incurred during the year by the taxpayer and reimbursed by the employer, or paid by the employer on the taxpayer’s behalf.
Generally, for an individual to qualify for the FEIE Benefits, a “tax home” must be maintained in a foreign country and minimum time requirements of either the Bona Fide Foreign Resident (BFR) or Physical Presence Test (PPT) must be met. As will be discussed in today’s post, these minimum time requirements may prove troublesome for some taxpayers caught in the COVID-19 pandemic.
Generally, a “tax home” is the location of the main place of business, irrespective of where a family home is maintained. If the nature of a person’s work means that there is no regular or main place of business, then the tax home may be the place where the person regularly lives.
A person is not considered to have a tax home in a foreign country if the person’s household is maintained in the US. Temporary presence in the US (for example, for vacation or for employment), does not necessarily mean that the household is in the US during such time. In defining what is meant by a “tax home” the law provides that the taxpayer shall not be treated as having a “tax home” in a foreign country “for any period for which his abode is within the United States.” The difference between one’s “tax home” and one’s “abode” is a somewhat complicated question and is the subject of a separate blog posting. The issue of a US “abode” also raises problems for some expats during this unprecedented time and is discussed in the aforementioned post.
The term “foreign country”, where the tax home must be maintained, refers to areas outside the United States. However, the term does not include Antarctica or US territories such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or the US Virgin Islands, and American Samoa.
The BFR Test
To meet the BFR Test, a person must be a bona fide resident of a foreign country for an uninterrupted period which includes a full calendar year. The individual will usually not meet the BFR test in the first year abroad, unless he has moved to the foreign country and is residing there on January 1 of the relevant year. Whether one is a bona fide “resident” is determined based on all of the facts and circumstances. The individual must have established a “tax home” there and in effect “settled” in that country. For example, one would look to whether the individual has rented an apartment in the foreign country, opened a local bank account, joined local social groups, obtained a local driver’s license, and so on.
To meet the PPT an individual must be a US citizen or a resident alien, who is physically present in a foreign country or countries for 330 days in any 12 consecutive months. The 330 days do not have to be consecutive, but they must be whole days present in a foreign country. Travel time does not count toward the requisite 330 days if the travel is in the US or its possessions for periods of 24 hours or more, or takes place over international waters. Record-keeping is obviously very critical. The PPT often helps an individual on short assignment. It also enables an individual to come back to the US for short periods (generally up to one month) in any consecutive 12-month period and still qualify for the exclusions.
The Impact of COVID-19
As discussed, both the BFR and PPT impose minimum time requirements. The speed with which the COVID-19 pandemic has spread has resulted in lockdowns in most countries, bringing cross-border travel to a screeching halt. With the pandemic raging, many people have become immobilized and stuck in a place not of their own choosing. Some expatriates could not leave the United States to return to their post of foreign employment; others may have been sent back to the United States either by their employers or by the foreign host country. What might this mean for claiming the FEIE Benefits?
There are two exceptions to meeting the minimum time requirements under the BFR and PPT. (See generally IRC Section 911(d)(4) and (d)(8); also IRS Publication 54 at pages 15-16). The time requirements will be waived and will allow a taxpayer to still use the FEIE Benefits when the taxpayer: (i) is forced to leave certain countries early due to war, civil unrest, or other adverse circumstances which precluded the normal conduct of business by such individuals or (ii) is faced with travel restrictions imposed by the US for certain countries which preclude the taxpayer from accruing qualifying time in the restricted country. By way of further explanation about (ii), if a taxpayer is present in a foreign country in violation of US law because the US has prohibited travel there, the time spent in that country cannot count for purposes of the BFR or PPT. Income earned for services performed there during a period of violation will not qualify for the FEIE and housing expenses incurred while in violation of the law cannot be included in figuring the FHE amount. (For 2019, for example, Cuba was the only country listed for travel restrictions).
IRS Announces Waiver of Time Requirements Due to COVID-19
The Internal Revenue Service just provided relief from the minimum time requirements imposed for obtaining FEIE Benefits due to COVID-19. Normally, early each year, the IRS publishes an Internal Revenue Bulletin with a list of the foreign countries for which the minimum time requirements are waived for the prior year and the effective dates. Due to the unprecedented nature of the pandemic the IRS issued Rev. Proc. 2020-27 yesterday April 21, adding to the many tax-related relief provisions put in place due to the pandemic.
For 2019 and 2020, the Secretary of the Treasury, after consultation with the Secretary of State, determined that, for purposes of section 911(d)(4), the COVID-19 Emergency is an adverse condition that precluded the normal conduct of business with the effective dates as follows:
• in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of December 1, 2019; and
• globally, as of February 1, 2020.
The period covered by the revenue procedure ends on July 15, 2020, unless an extension is announced. What this means is that for purposes of Section 911, an individual who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020, will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, that foreign country. Under the waiver rules, if a taxpayer left one of the IRS-enumerated countries on or after the effective date, the taxpayer can meet the BFR or PPT for that year without actually meeting the minimum time requirement.
The individual, however, must establish a reasonable expectation that he or she would have met the requirements of Section 911(d)(1) “but for” the COVID-19 Emergency. In other words, the taxpayer must be able to show that he reasonably could have expected to meet the minimum time requirements if not for the triggering condition. To qualify for the waiver, the taxpayer must be able to establish a tax home in the foreign country and that the taxpayer was a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
Even though a taxpayer can still meet the minimum time requirements using the waiver, in figuring the FEIE Benefits, the number of qualifying days of bona fide residence or physical presence only includes days of actual residence or presence within the foreign country.
Posted April 22, 2020
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