When global travel stalled and stay-at-home orders went into effect, many US expats rushed back to the USA. Other people ended up quarantining far from home. As a result, numerous US citizens, residents, and foreign travelers are spending more time in the United States than they expected. This could impact their US tax situation for 2020 and even 2019.
Are you worried about the coronavirus impact on the FEIE, the Substantial Presence Test, or US profits because you are spending more time in the USA than planned?
Fortunately, the IRS announced some relief for the tax implications of extra days in the United States.
Qualifying for the Foreign Earned Income Exclusion when spending more time in the US
Many US citizens working abroad rely on the Foreign Earned Income Exclusion to lower their US tax bill. With spending extended time in the US in 2020, they may not meet the general requirements to qualify. Fortunately, the IRS just started to address this concern.
The IRS has determined that the world is experiencing adverse conditions because of COVID-19. This means that some US expats can request an adverse conditions waiver as a reason for not passing the Physical Presence Test or Bona Fide Residence Test. These two tests are used to qualify for the Foreign Earned Income Exclusion (FEIE).
How to claim the Adverse Conditions Waiver
The IRS Form 2555 instructions include a waiver of time requirements under certain circumstances. US taxpayers living abroad can request an Adverse Conditions Waiver when they must leave their home in a foreign country due to war, civil unrest, or other adverse conditions that make normal business impossible.
In these cases, expats need to show that they would have passed one of the FEIE tests if the adverse condition had not occurred. The adverse condition must have appeared after the expat moved there.
The IRS declared specified dates for when normal business became impossible due to COVID-19. For Mainland China, the date is December 1, 2019. For the rest of the world, the date is February 1, 2020.
The requirements for expats to claim adverse conditions are:
- Established a tax home in a foreign country
- Established residency or was physically present in China or another foreign country before the specified dates.
- Left China or another foreign country on or after the specified dates.
- Would have passed the Bona Fide Residency Test or the Physical Presence Test during a period of 12 consecutive months if the coronavirus crisis had not occurred.
The adverse conditions period ends on July 15, 2020. This can change if the Treasury Department and IRS announce an extension.
If an American abroad established physical presence or bona fide residency after the specified dates, they cannot claim adverse conditions.
Our team monitors any updates and guidance from the IRS on this and related topics. We can help you determine if you qualify and prepare your tax return accordingly year.
COVID-19 Impact on 2019 and 2020 Foreign Earned Income Exclusion
For most expats this waiver probably affects their 2020 taxes. However, depending on the time period you are using to qualify for the FEIE, it might apply to your 2019 taxes as well.
For example, you moved from the United States to another country on July 1, 2019, and expected to be abroad at least 330 days until June 30, 2020. This would have allowed you to claim the FEIE for 2019 and use it pro-rated for the months spent abroad. However, when the coronavirus crisis unfolded you rushed back home to the US and spent extended time there. Ordinarily, you would not be able to claim the FEIE for the last part of 2019 because you weren’t abroad 330 days in the intended 12-months period.
However, if you left the foreign country after December 1, 2020, (if from China) or February 1, 2020 (from anywhere else) and can show that you would have stayed otherwise, you will be able to claim the Adverse Conditions Waiver.
Emergency extension for the Substantial Presence Test for foreign travelers in the United States
Tourists who spend too much time in the US can become tax residents, even if they do not have citizenship or permanent residency. (The IRS uses the Substantial Presence Test to determine tax residency.) The IRS relief helps these visitors avoid becoming tax residents.
February 1, 2020, through April 1, 2020, has been designated as the “COVID-19 Emergency Period” by the IRS. Foreign travelers who intended to leave the US between those dates but were unable to because of coronavirus travel disruptions can exclude up to 60 days from the substantial presence test.
Travel disruptions include restrictions of movement by government authorities, canceled flights, disruptions in other types of transport, shelter-in-place orders, quarantines, and border closures. Furthermore, many do not feel safe traveling at this time due to social distancing recommendations.
If a foreigner attempts to become a United States resident during the emergency period, they are not eligible for this extension.
Non-residents who are required to file US taxes may need to claim this emergency period in their tax return. Non-filing foreigners do not need to submit a claim but should keep records.
Tax exclusions for profits earned while in the USA
The relief also includes provisions for individuals engaged in business activity in the United States as a result of COVID-19. US expats and nonresident aliens who perform services or other activities in the United States between February 1, 2020, and April 1, 2020, do not need to calculate this as business profits for tax purposes.
To qualify, expatriates must have had a tax home outside of the United States in 2019. Likewise, the expat must expect to have a tax home outside of the United States in 2020.
This relief only applies if the individual performs the services or activities in the US solely because of the travel disruptions. In other words, if the coronavirus had not disrupted their travel plans, they would perform the services or activities outside of the United States.
Impactful tax relief for those staying in the US during the COVID-19 pandemic
Expats and individuals in the US will likely feel relief at these announcements. It’s especially important for those faced with expensive taxes during a difficult economic climate. Please keep in mind that the IRS frequently releases updates or clarifications as this is unchartered territory for everyone.
Because of these unusual circumstances and the complexity of these announcements, we recommend consulting with a tax expert to confirm your eligibility.
Our team is working to keep you updated on any changes. You can also follow us on LinkedIn, and Facebook for updates.