COVID Travel Restrictions and the Foreign Earned Income Exclusion
The US government’s economic response to the COVID pandemic has taken a number of forms, including economic stimulus payments to individuals, economic relief for small businesses, extended reporting deadlines, and many other efforts.
As a part of these efforts, the IRS has also taken aim at softening some of the cross-border taxation rules.
One relief provision in particular may become very relevant for many expats this year, because it relates to the Foreign Earned Income Exclusion, an expat tax basic concept.
The Foreign Earned Income Exclusion
The foreign earned income exclusion is a very common method used by expat taxpayers to avoid the double taxation of income earned while living abroad.
If you can establish that your tax home is outside the US (which includes the requirement that you do not have an abode in the US), and you can satisfy either the “bona fide residence” test or the “physical presence” test, you can exclude your foreign income from US tax.
The latter test is passed if you are present in a foreign country for 330 full days during a period of 12 consecutive months.
The excludable amount is adjusted each year. For 2020, the maximum exclusion amount was $107,600.
Relief for COVID Travel Restrictions
To lessen the hardships caused in 2020 because of the COVID pandemic, the IRS issued Revenue Procedure 2020-27, which states that qualification for the foreign earned income exclusion will not be impacted if you had to leave your foreign country due to the COVID-19 emergency.
The Revenue Procedure provides that:
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 if the individual establishes a reasonable expectation that he or she would have met the requirements of section 911(d)(1) but for the COVID-19 Emergency.
The IRS gives the following example to illustrate how the exemption works:
An individual who was present in the United Kingdom on January 1 through March 1, 2020, establishes that he or she reasonably expected to work in the United Kingdom for the entire calendar year, but departed the United Kingdom on March 2, 2020, due to the COVID-19 Emergency, and returns to the United Kingdom on August 25, 2020, for the remainder of the calendar year, would be a qualified individual for 2020 with respect to the period between January 1 through March 1, 2020, and August 25 through December 31, 2020, assuming the individual has met the other requirements for qualification under section 911.
Interpreting the Revenue Procedure for COVID Relief
Taken literally, Revenue Procedure 2020-27 seems to only apply to US taxpayers who were required to leave their foreign country because of COVID. Some practitioners are interpreting the Revenue Procedure to mean that it includes a situation where a US citizen living abroad left their foreign country voluntarily but then became stuck in the US at some point between Feb 1 and July 15, 2020 because of COVID.
Under this understanding, the following example would follow:
Mr. X is a US citizen living in the UK. On January 20, 2020, Mr. X goes to visit his parents in the US. He plans to fly back on February 5, 2020. His flight is cancelled and he can’t and doesn’t fly back to the UK until July 20, 2020. The outcome would be that since he was not allowed to return on February 5, the period between February 5 and July 20 should not be considered in determining whether Mr. X qualifies for the foreign earned income exclusion.
Importantly, in the above example, Mr. X would qualify for only half of the exclusion, because he spent half the year in the US. Meaning, although the Revenue Procedure offers relief – namely, that the time spent in the US will not jeopardize the person’s ability to qualify for the exclusion – the days spent in the US do not qualify for the exclusion.
In terms of compliance, in order to claim the relief, Mr. X will have to write "Revenue Procedure 2020-27" across the top margin of the Form 2555, the form used to claim the foreign earned income exclusion.
