Foreign Earned Income Exclusion – Travel Time Requirement Waivers

May 22, 2020

The IRS provided time waivers for qualifying for the foreign earned exclusion for U.S. citizens and residents living abroad in China from December 1, 2019 and globally from February 1, 2019 through July 15, 2020. An individual who originally expected to meet the requirements for the foreign earned income exclusion may still qualify to exclude foreign earned income, even if travel restrictions or early departures prevented meeting the Bona Fide Resident or Physical Presence Test requirements, on the 2019 or 2020 U.S. income tax returns.

An eligible U.S. Citizen or resident living abroad may exclude up to $107,600 annually on their 2020 U.S. income tax return ($105,900 for 2019) for wages or other income earned while working abroad. Additional exclusions or deductions are also available for foreign housing expenses. In order to qualify for the exclusion, an individual’s tax home, or primary place of work, must be overseas and that individual must also meet time requirements under either the Physical Presence Test or Bona Fide Resident Test.

  • The Physical Presence Test requires individuals to be present outside the U.S. for at least 330 days in any twelve-month period.
  • An individual may qualify under the Bona Fide Resident Test by residing in a foreign country for an uninterrupted period that includes a full calendar year.

The IRS does have provisions in place to waive time detailed above when an individual left the country earlier than expected and might otherwise expect to qualify for the exclusions. Various reasons include war, civil unrest, or similar adverse conditions. Under the time waivers, the individuals must establish that the time requirements would have otherwise been met. The IRS annually provides a list of countries where time requirements may be waived. As a result of the global health emergency caused by COVID-19, the IRS issued guidance which has added the following time waivers:

  • 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.

Note: these time waivers are set to expire on July 15, 2020 unless an extension is announced by the Treasury Department and IRS. Based on these time waivers, an individual who had otherwise planned to qualify for the foreign earned income exclusion may disregard days spent in the U.S. between December 1, 2019 through July 15, 2020 or globally from February 1, 2020 through July 15, 2020.

For example, a U.S. citizen began working in Germany on June 1, 2019, expecting to live and work in Germany for one year. That individual expected to otherwise meet the requirements and qualify for the foreign earned income exclusion on a 2019 tax return by utilizing a qualifying period of June 1, 2019 through May 31, 2020, but returned to the U.S. early on March 15, 2020. That individual may still qualify for the foreign earned income exclusion on the 2019 tax return and may exclude foreign earned income from June 1, 2019 through December 31, 2019 on the 2019 tax return. The foreign earned income exclusion may also be available for income earned from January 1, 2020 through March 15, 2020 on the 2020 U.S. tax return.

To discuss the impact these disruptions could have on you or your employees’ income tax reporting requirements with an Aprio tax expert, click here.

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