If the federal tax you pay is dependent on where you are physically located, then COVID-19 likely has thrown a wrench in your physical tax location (and tax situation).
If you were living abroad and had to return to the U.S. because of COVID-19, you may wonder if you’ll have a big tax bill for failing to meet the foreign earned income exclusion requirements.
If you are a non-resident alien who got stuck in the U.S. because of COVID-19, you may be worried that the IRS will consider you a U.S. resident for tax purposes—thereby allowing Uncle Sam to tax your worldwide income.
Here’s good news. The IRS has provided relief in both circumstances, if you qualify.
Foreign Earned Income Exclusion
The tax law gives you a huge tax benefit if you live or work abroad, which allows you to exclude a significant amount of your income from federal tax. In 2020, the maximum exclusion is $107,600 per person plus an additional amount for foreign housing costs.
To claim the exclusion, you need
You’ll still be a qualified individual for the foreign earned income exclusion if you had to leave the foreign country because of war, civil unrest, or similar adverse conditions that precluded the normal conduct of business.
The IRS has ruled that COVID-19 is an adverse condition that precluded the normal conduct of business as follows:
To use this relief procedure, you had to
The period covered by this relief ends on July 15, 2020.
Exclusion Relief Example
Joe is present in the United Kingdom from January 1, 2020, through March 1, 2020, and expected to work in London for all of calendar year 2020.
Due to COVID-19, Joe leaves the United Kingdom on March 2, 2020, then returns on August 24, 2020, and stays for the remainder of 2020.
Joe is a qualified individual for the foreign earned income exclusion for the following periods:
Because Joe has 188 qualifying days in the calendar year period, his maximum foreign earned income exclusion in 2020 is $55,270.
If you are a citizen or resident of the United States, then you pay federal tax on your worldwide income.
If you are a non-resident alien, then you pay tax only on your U.S. source income. Therefore, if you aren’t a U.S. citizen or resident, but work occasionally in the U.S., you don’t want to become a U.S. resident for tax purposes.
If you are neither a U.S. citizen nor a lawful permanent resident, then you become a U.S. resident for tax purposes for a calendar year if you meet the substantial presence test in that calendar year.
To meet the substantial presence test for a calendar year, you would be present in the U.S. for at least
Therefore, if you work in the U.S., and couldn’t leave due to COVID-19, your worldwide income could be subject to U.S. tax.
You don’t count certain days toward the substantial presence test, including medical condition exception days, which are days in which you intended to leave the U.S. but were unable to do so because of a medical condition that arose while you were present in the U.S.
If you intended to leave the U.S. during your COVID-19 emergency period, but you were unable to do so due to COVID-19 emergency travel disruptions, you can exclude the COVID-19 emergency period days from the substantial presence test.
Your COVID-19 emergency period is a single period of up to 60 consecutive calendar days that you select, starting on or after February 1, 2020, and on or before April 1, 2020, during which you were physically present in the United States for each day.
You qualify for this relief if
To claim your relief, you will either
Residency Relief Example
Martha arrived in the United States on August 14, 2019, and anticipated staying for work through March 31, 2020. With this schedule, she would not have met the substantial presence test in either 2019 or 2020.
But due to COVID-19, Martha did not leave the U.S. until May 26, 2020. Without relief, Martha would be a U.S. resident in calendar year 2020 with 192 days of presence:
If Martha selects April 1, 2020, as the start of her COVID-19 emergency period, then she is not a U.S. resident in calendar year 2020 because she’ll only have 136 days of presence:
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.