Americans working abroad are usually 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 are governed by Internal Revenue Code Section 911 and are collectively referred to in this post, as “FEIE Benefits”.
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. These minimum time requirements may prove troublesome for some taxpayers for the 2019 or 2020 tax years in throes of the COVID-19 pandemic if they were forced to leave the foreign country and return to the US.
IRS COVID-19 Relief for Expatriates
In April of this year, the Internal Revenue Service (IRS) issued Revenue Procedure 2020-27. In response to the unprecedented nature of the COVID-19 pandemic, the Revenue Procedure provided some relief from the minimum time requirements concerning presence in a foreign country as required for individuals wishing to obtain FEIE Benefits.
Pursuant to the Revenue Procedure, for 2019 and 2020, the IRS 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. 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.
Eligibility for the waiver is possible if the taxpayer can establish a reasonable expectation that he or she would have met the Section 911 time requirements “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 pandemic. 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.
IRS Issues 2020 Form 2555 and Instructions Detailing COVID-19 Relief
The IRS has now issued for the 2020 tax year, the Form 2555 and instructions implementing the COVID-19 relief. The instructions dovetail the Revenue Procedure. (The 2019 Instructions to Form 2555 did not contain any detail, but had a cover page providing information about the Revenue Procedure.).
Taxpayers needing to use the waiver relief for 2019 or 2020 should write “Revenue Procedure 2020-27” across the top margin of the Form 2555.
Below is an example from the 2020 instructions illustrating how the time waiver would work:
Example. You were in the United Kingdom from January 1 through March 1, 2020. You reasonably expected to work in the United Kingdom for the entire calendar year 2020. You were required to leave the United Kingdom on March 2, 2020, due to the COVID-19 emergency. You returned on August 25, 2020, and remained in the United Kingdom through December 31, 2020. You are eligible for the waiver for calendar year 2020, with respect to the period between January 1 through March 1, 2020, and from August 25 to December 31, 2020, and thus a qualified individual, if you meet the other requirements of the foreign earned income exclusion.
More Information
Those needing more information about the FEIE Benefits can find it in the category page of my blog which contains all earlier posts on the topic.
Posted December 3, 2020
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