This article applies to U.S. taxpayers that utilize or have utilized the Foreign Earned Income Exclusion (FEIE) . The IRS recently allowed a taxpayer to reelect the FEIE within six years after they revoked the election.
Abstract: In Private Letter Ruling 202122001, the IRS recently allowed a taxpayer to reelect the foreign earned income exclusion within six years after he revoked the election. This article explains why the taxpayer could reelect the exclusion earlier than usual.
Taxpayer Allowed Earlier Reelection of Foreign Earned Income Exclusion
In Private Letter Ruling (PLR) 202122001, the IRS recently allowed a taxpayer to reelect the foreign earned income exclusion within six years after he revoked the election. This is slightly earlier than what is usually permissible.
Basics of the Election
Under Internal Revenue Code Section 911(a), certain taxpayers may elect to exclude foreign earned income in the calculation of gross income. This election applies to the tax year for which it’s made and for all subsequent tax years until it’s revoked by the taxpayer.
A taxpayer can revoke the election to exclude foreign earned income by claiming the foreign tax credit. Generally, once a taxpayer revokes the election to exclude foreign earned income by claiming the foreign tax credit, he or she may not reelect the exclusion until the sixth tax year after the year the election was revoked.
The IRS may, upon a taxpayer’s request and after considering all relevant facts and circumstances, permit him or her to reelect the foreign earned income exclusion before the sixth year after revoking the election. Relevant facts and circumstances include whether the taxpayer: 1) was a U.S. resident for a period before the sixth year, 2) moved from one foreign country to another foreign country with differing tax rates, and 3) changed employers.
In the case that prompted the PLR, the taxpayer was a U.S. citizen who worked for Company A in Country X from Year 1 to mid-Year 3. On his U.S. income tax returns for Year 1 and Year 2, he claimed the foreign earned income exclusion.
The taxpayer returned to the United States in Year 3. On his income tax return for that year, he claimed the foreign tax credit instead of the foreign earned income exclusion.
The taxpayer lived and worked in the United States until Year 4, when he moved to Country Y and began working for Company B. His earned income in Country Y was subject to a different rate of tax than it was in Country X.
At issue in the PLR was whether the taxpayer may reelect the foreign earned income exclusion for Year 5 and subsequent tax years. The IRS held that, yes, he may indeed do so.
In its explanation, the agency noted that the taxpayer had effectively revoked the foreign earned income exclusion for Year 3 by claiming the foreign tax credit. Generally, a taxpayer couldn’t reelect the foreign earned income exclusion before the sixth year after the year he or she revoked the election.
However, in this case, the taxpayer was a U.S. resident in between his time spent working in Country X and Country Y. In addition, he changed employers, moved from one foreign country to another, and the applicable foreign income tax rates differed between Country X and Country Y.
Therefore, under the relevant facts and circumstances, the IRS found that the taxpayer should be allowed to reelect the foreign earned income exclusion for Year 5 and subsequent years.
It Pays To Know the Rules
A PLR applies only to the taxpayer who requested it and cannot be used as precedent. However, it can be a good indication of how the IRS would rule in a similar situation.
This case demonstrates that, though typically a taxpayer couldn’t reelect the exclusion as soon as this one did, there are situations in which an earlier reelection is available. If you find yourself in similar circumstances, contact your CPA to discuss further.
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