Many US citizens came back to the United States in March and April due to COVID-19. It was either due to regulatory reasons (immigration laws of the host country) or health reasons. Questions can arise as to their eligibility to use the Foreign Earned Income Exclusion.
If you look closely to form 2555, you would see a question on part I, question 8a. Did you maintain a separate foreign residence for your family because of adverse living conditions at your tax home?
The Treasury Department can indeed decide that your own country (“tax home”) is unsafe. Then, you may relocate anywhere in the world. You can still claim the Foreign Earned Income Exclusion. You may relocate anywhere, including the United States.
It has been extremely rare for the Treasury Department to invoke it.
On April 21, 2020, the Treasury Department and the IRS issued Rev. Proc. 2020-27. This guidance provides a waiver time thresholds individual taxpayers must satisfy. These are the conditions to claim the FEIE and the foreign housing cost amount under section 911. If the individual failed to meet the threshold because he/she fled the foreign country on/after a specified date because of the COVID-19 virus.
Section 911 (d)(4) and COVID-19 Emergency
For 2019/20, the Secretary of the Treasury determined that, for purposes of section 911 (d)(4), the COVID-19 Emergency is an adverse condition. It precludes 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.
U.S. citizens or resident aliens qualifying for the FEIE can exclude an amount of foreign earned income from U.S. taxation annually.
In order to qualify, the individual must have a tax home in a foreign country. An individual must meet one of two qualifying tests. Under the bona fide residence test, a U.S. citizen must establish to the satisfaction of the Secretary of the Treasury. It must show that he/she has been a bona fide resident of a foreign country/ies for an uninterrupted period. It must include an entire tax year. Alternatively, a citizen or resident of the U.S. can qualify if he or she has a tax home in a foreign country and during a rolling period of 12 consecutive months, he/she was present in a foreign country or countries during at least 330 full days.
However, if the Secretary determines that individuals were required to leave a foreign country because of war, civil unrest or similar adverse conditions in such foreign country, and such conditions precluded the normal conduct of business by such individuals, the individuals may be treated as qualified individuals (i.e., eligible to claim the FEIE and/or the foreign housing cost amount) for the period during which the individual is resident in the foreign country. To take advantage of this relief, an individual must establish that if those conditions had not arisen, the individual could reasonably have been expected to meet the eligibility requirements.
Secretary has determined that the COVID-19 emergency precluded the normal conduct of business globally.
Secretary has provided a waiver of time requirements globally as of Feb. 1, 2020. And, in the People’s Republic of China as of Dec. 1, 2019. This excludes the Special Administrative Regions of Hong Kong and Macau, The period covered by the waiver of time requirements ends on July 15, 2020. An individual who left a foreign country on/after Feb. 1, 2020, (or China on or after Dec. 1, 2019) but on or before July 15, 2020, may be a qualified individual during the period the individual was present in a foreign country.
In order to qualify for the waiver of the time thresholds, an individual must have either established residency. Or, been physically present in that foreign country. Both prior to the dates listed above. A qualifying individual would need to establish to the satisfaction of the Secretary that he/she could reasonably have been expected to have met the time-based requirements for the physical presence test or the bona fide residence test had it not been for the COVID-19 virus.
Thus, a showing that the individual returned to the U.S. in order to flee the virus is not enough to qualify for relief.
Qualified individuals generally may exclude a portion of their earned income and amounts paid for foreign housing subject. Of course, to certain statutory limits.