COVID-19 AND THE FOREIGN EARNED INCOME EXCLUSION
U.S. citizens living in a foreign country are subject to the same U.S. income tax laws that apply to U.S. citizens living in the United States. This means that U.S. citizens living abroad are subject to U.S. income tax on their worldwide income and are required to file a U.S. tax return each year. However, if specified requirements as to residency or physical presence in a foreign country are met, they may elect to use the Foreign Earned Income Exclusion to exclude from gross income up to $105,900 (2019) of their foreign earnings. For most Americans who live abroad, this results in a significant reduction of their U.S. tax liability. The Treasury Secretary has determined the COVID-19 Emergency is an adverse condition that precludes the normal conduct of business, waiving the time requirements of the Foreign Earned Income Exclusion for 2019 and 2020.
RESIDENCY AND PHYSICAL PRESENCE REQUIREMENTS
Generally, you must meet one of the following two tests to qualify for the Foreign Earned Income Exclusion:
‘Physical Presence Test’: You meet the Physical Presence Test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive.
‘Bona Fide Residence Test’: To meet the Bona Fide Residence test, you must be a bona fide resident or a foreign country for an uninterrupted period that includes an entire tax year (January 1 – December 31). Whether you are a bona fide resident of a foreign country is determined based on all relevant facts and circumstances, such as your intention with regard to the length and nature of your stay in the foreign country, physical presence, payment of tax to the foreign country, whether your family lives with you or stayed in the U.S., your income tax status in the foreign country, etc. As the taxpayer, you must provide strong proof to establish your bona fide residency to the satisfaction of the IRS.
In case you do not meet either the Physical Presence Test or the Bona Fide Residence Test by the filing deadline of June 15, you should file for an extension until October 15. If you still do not meet the requirements by the extended October 15 deadline, you can file IRS Form 2350 to ask for an additional extension, allowing you to file your federal income tax return when you qualify for the Foreign Earned Income Exclusion.
WHAT IF YOU CAN’T MEET THE REQUIREMENTS BECAUSE OF COVID-19?
Because of the COVID-19 Emergency, the IRS provided a waiver of the time requirements of the Foreign Earned Income Exclusion (Rev. Proc. 2020-27). The waiver applies to any individual who reasonably expected to meet the eligibility requirements of the Foreign Earned Income Exclusion during 2019 or 2020, but failed to do so because the individual departed a foreign country on or after February 1, 2020 (China: December 1, 2019). The period covered ends on July 15, 2020.
To qualify, an individual must have established residency, or have been physically present, in the foreign country on or before February 1, 2020 (China: December 1, 2019).
If you have any questions about COVID-19 and the Foreign Earned Income Exclusion, please don’t hesitate to contact us. Sanders US Tax Services specializes in U.S. tax return preparation for Americans living abroad and anyone else dealing with the U.S. tax system. We are multilingual and have offices in Germany, Switzerland, the Netherlands, and the United States.