The IRS recently released the 2020 version for Form 2555, Foreign Earned Income. This form is used by Americans living and working overseas to exclude approximately $107,600 of certain types of earned income from US taxation. Qualification for this benefit requires meeting one of two tests (see below) to determine foreign residency. The instructions to the revised form now include information on how to claim a waiver if an individual was forced to leave the other country due to COVID-19.
The foreign earned income exclusion under Section 911 allows U.S. citizens who maintain their tax home outside of the U.S. and who satisfy either the bona fide residence test or physical presence test to exclude their foreign earned income. The bona fide residence test requires a taxpayer to reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. The Physical Presence Test requires a taxpayer to be physically present in a foreign country or countries for 330 days during any consecutive 12-month period included part of the tax year applicable.
An exemption to the above residency rules exists if the Secretary of the Treasury, after consulting with the Secretary of State, determines that individuals were required to leave a foreign country due to war, civil unrest, or similar adverse conditions that preclude the normal conduct of business. In April of 2020, the IRS announced that for 2019 and 2020 the coronavirus pandemic is an adverse condition that precludes the normal conduct of business. The IRS has since issued Rev. Proc. 2020-27 which allows a qualified individual to exclude foreign earned income even if they fail to meet the bona fide residence or physical presence test.
To qualify for the relief, the individual must establish the following.
- Establish residency or have been physically present in either:
- the People’s Republic of China on or before December 1, 2019
- any other foreign country on or before February 1, 2020
- Have departed:
- the People’s Republic of China between December 1, 2019, and July 15, 2020
- any other foreign country on or after February 1, 2020, but on or before July 15, 2020
- The individual would have met the requirements under the bona fide residence or physical presence test but for the COVID-19 emergency
Please feel free to contact your WG advisor if you have any questions or concerns regarding how your tax situation may be affected by COVID-19.