12.04.2020

IRS Grants Relief For Americans Using Foreign Earned Income Exclusion

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It’s pretty rare… but every once in a while the IRS will cut you some slack.

In light of the Coronavirus emergency, the IRS has eased the qualifications for the Foreign Earned Income Exclusion (FEIE).

This post will cover the new IRS procedure regarding the FEIE.

If you are currently unaware of the FEIE, you’ll learn how it’s possible to earn more than $100,000 and legally pay $0 in income!

What is the Foreign Earned Income Exclusion?

The FEIE is likely the most powerful tax reduction strategy for most Americans.

In 2020, qualifying Americans are allowed to exempt $107,600 (or, $215,200 for married couples) from their income. Meaning, you can earn this amount of income and legally pay $0 in income taxes.

Each year the exemption amount is adjusted for inflation.

How To Qualify For The Foreign Earned Income Exclusion?

Ordinarily, there are two ways to qualify for the FEIE.

1 – Physical Presence Test (PPT)
  • Spend 330 days out of any 365-day period inside of a foreign country.
2  – Bona Fide Residence Test (BFRT)
  • Prove that you were a resident of a foreign country for an entire tax year.

Proving you are a resident includes obtaining a residency permit or citizenship of the country, spending enough days there to become a tax resident, and establishing ties in the community (such as joining a gym or social club, having your children go to school there, using the jurisdiction as your hub for travel, etc.)

A huge benefit of the BFRT is that it allows for significantly more days in the US compared to the PPT.

For people qualifying under the BFRT, we recommend a maximum of 120 days.

New IRS Relief Procedure For The Foreign Earned Income Exclusion

The IRS Released a Revenue Procedure announcing that it will waive the time requirements typically demanded to qualify for the FEIE.

The IRS has the power to waive the time requirements for instances of war, civil unrest, or similar adverse conditions that preclude the normal conduct of business.

The Coronavirus emergency qualifies as an “adverse condition” due to the massive disruptions on international travel, border closures, and mandatory quarantines.

Specifically, this “adverse condition” includes the period from December 1, 2019 to July 15, 2020 for the People’s Republic of China (excluding Hong Kong and Macau) and for the period of February 1, 2020 to July 15, 2020 for all other nations.

Important Dates

An individual who left:

·   China on or after December 1, 2019; OR

·   Any other foreign country on or after February 1, 2020

Will be treated as physically present in, or as a bona fide resident of, that foreign country during that period.

Assuming all other qualifications are met, such a person will be eligible for the FEIE.

Example

John is an American living in Singapore. 

One February 15, 2020, he flew to London for work.

But John’s travels were interrupted due to quarantines and international border closings – he returned to Singapore on July 10, 2020.

Assuming a few other conditions are met (such as acquiring a local phone number, and becoming part of the local community), John will benefit from the special IRS rules for 2020.

John left Singapore after the February 1, 2020 date set by the IRS and he returned to Singapore before the July 15, 2020 deadline. 

John will qualify for the FEIE. 

Want Some Help?

Whether or not you need to use the new relief procedure to qualify for the FEIE, our international tax consultants are ready to help you meet your tax obligations and minimize taxes whenever possible.

Take the first step in becoming a Concierge Tax Service client by clicking the button below.

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