COVID-19 and Foreign Earned Income Exclusion

Many US taxpayers residing overseas make use of the Foreign Earned Income Exclusion (FEIE) when filing their US tax returns. To claim these exclusion the US tax payer must have met one of two tests:

1. The taxpayer must be a bona fide resident of a foreign country for a period which includes a complete US tax year.
2. The taxpayer should be physically present in a foreign country for at least 330 days in a 12 month period.

With the rapid spread of Covid-19 which has led to travel restrictions and lockdowns, some US citizens who are resident overseas may have repatriated to the US either temporarily or permanently, or have relocated to another country. In these situations a taxpayer may have been unable to claim the allowable exclusion on their 2019 or 2020 US tax return.

The US Treasury and Internal Revenue Service have now issued Revenue Procedure 2020-27 which clarifies the treatment of days spent either in the US or a third country due to the global pandemic. Section 911 of the IRS code states that an taxpayer can be treated as having met the relevant qualifying test if that taxpayer had left the foreign country during a period in which the Secretary of Treasury determines a condition of war, civil unrest, or similar adverse conditions which would affect normal conduct of business. For purposes of meeting the FEIE tests, COVID-19 is considered an adverse condition that precluded normal conduct of business and as such an affected taxpayer may be treated as having met the FEIE tests even if they had left the foreign country during the pandemic.

For the purposes of claiming the relief the taxpayer must have established residency in the foreign country before the following dates and should have reasonably expected that they would have been present in that country for at least 330 days in the following 12 month period except for the Covid-19 emergency:

• People Republic of China - 1 December 2019 (excludes Hong Kong and Macau)
• Rest of the World - 1 February 2020

The relief applies through to July 15, 2020.

If you are a US citizen and your overseas residency has been affected by the Covid-19 pandemic and you are unsure if you are able to claim the Foreign Earned Income Exclusion (FEIE) please contact Tax Advisory Partnership.