IRS Provides Tax Relief for U.S. Citizens/Residents Living Abroad

U.S. citizens or residents living abroad may qualify to exclude from income up to an amount that is adjusted annually for inflation ($105,900 for 2019 and $107,600 for 2020).  In addition to the foreign earned income exclusion, individuals may qualify to claim an exclusion or a deduction from gross income for the foreign housing amount.  The housing exclusion amount is generally the total of the housing expenses for the tax year less the base housing amount.  The total housing expense is also limited to 30% of the maximum foreign earned income exclusion multiplied by the number of days in the applicable period.  The base housing amount is limited to 16% of the foreign earned income exclusion multiplied by the number of days in the applicable period.  For 2019 and 2020 the figures are $16,944 and $17,216, respectively.

What happens if an individual leaves the foreign country as a result of the COVID-19 epidemic?

In Revenue Procedure 2020-27, the IRS and Treasury have provided a waiver from the eligibility requirements of both the bona fide residence and physical presence tests of IRC Sec. 911(d)(1). 

Under the foreign earned income exclusion and housing deduction/exclusion, “qualified individuals” can elect to exclude from gross income the individual’s foreign earned income and the foreign housing costs.  A qualified individual is an individual whose tax home is in a foreign country who is (i) a U.S. citizen who establishes that he/she has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year or is (ii) a citizen or resident of the U.S. who, during any 12 consecutive months, is present in a foreign country or countries during at least 330 full days.

In addition, under IRC Sec. 911(d)(4), individuals will be considered qualified with respect to a period in which the individual was a bona fide resident of, or was present in, a foreign country for any period if the individual left the country during a period for which Treasury determines individuals were required to leave because of war, civil unrest, or similar adverse conditions.  An individual must establish that “but for” these conditions, the individual could reasonably have expected to be eligible.

For the 2019 and 2020 tax years, the Treasury has determined that the COVID-19 pandemic is an adverse condition that precluded normal conduct of business in China, except Hong Kong and Macau, as of December 1, 2019, and globally as of February 1, 2020, continuing until July 15, 2020 unless an extension is announced by the Treasury Department and the IRS. 

To qualify for relief, an individual must have established residency, or been physically present, in the foreign country on or before December 1, 2019, in the case of China and February 1, 2020 in the case of the other areas of the world.  Individuals who could have met the 330-day requirement of presence but for the COVID-19 emergency and have met the other requirements for qualification may use any 12-month period to meet the qualified individual requirement. 

For example, under this Revenue Procedure, an individual who arrived in China on September 1, 2019 and establishes that he/she reasonably expected to work in China until September 1, 2020, but departed China on January 10, 2020 due to the COVID-19 emergency, would be a qualified individual for the period September 1, 2019 through December 31, 2019, and for the period January 1, 2020 through January 9, 2020, assuming the other requirements for qualification are met.