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What’s New With the Foreign Earned Income Exclusion – Form 2555?

This article is for an individual citizen or resident of the United States that had to leave their foreign country because of the COVID-19 pandemic.

Abstract: Late last year, the IRS released the 2020 versions of Form 2555, “Foreign Earned Income,” and its instructions. Information has been added to the instructions regarding how to claim a waiver related to the COVID-19 pandemic. This article discusses foreign earned income and how the waiver works.

Gross Income Exclusion

Internal Revenue Code Section 911(a) allows a “qualified individual” to elect to exclude from gross income his or her foreign earned income and foreign housing cost amount. Sec. 911(d)(1) defines the term “qualified individual” as one whose tax home is in a foreign country and who’s:

  • A citizen of the United States and establishes to the satisfaction of the IRS that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries for at least 330 full days.

However, Sec. 911(d)(4) provides that an individual will be treated as a qualified individual for a period in which he or she was a bona fide resident of, or was present in, a foreign country if the individual left the country during a period for which the Secretary of the U.S. Treasury, in consultation with the U.S. State Department, determines that individuals were required to leave. Such a requirement to leave must be attributable to war, civil unrest or similar adverse conditions that precluded the normal conduct of business. An individual must establish that, but for those conditions, he or she could reasonably have been expected to meet the eligibility requirements.

Adverse Condition

In April 2020, the IRS stated in Revenue Procedure 2020-27 that, for 2019 and 2020, the pandemic (referred to as the “COVID-19 Emergency”) is indeed an adverse condition that precluded the normal conduct of business:

  • In the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of December 1, 2019, and
  • Globally, as of February 1, 2020.

The period covered by the Revenue Procedure ended on July 15, 2020. Thus, someone who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020, will be treated as a qualified individual. This is applicable to the period during which the individual was present in, or was a bona fide resident of, that foreign country — so long as the individual establishes a reasonable expectation that he or she would have met the requirements of Sec. 911(d)(1) but for the COVID-19 Emergency.

Write It In

The Form 2555 instructions note that, to request the waiver cited in Revenue Procedure 2020-27, the taxpayer should write “Revenue Procedure 2020-27” across the top margin of the form. If you believe the waiver may be pertinent to your tax situation, discuss it with your CPA.

EFPR’s Additional Comments

In summary, the waiver allows eligible individuals to claim at least a portion of the benefit associated with the foreign earned income and housing exclusions. However, the amount of exclusion benefits remains limited to actual days of bona fide residence or physical presence in a foreign country. The waiver does not allow an individual to simply claim the full annual benefit without regard to travel. The example below copied from the Form 2555 instructions and also detailed in Rev Proc 2020-27 illustrates this point:

Example: You were in the United Kingdom from January 1 through March 1, 2020. You reasonably expected to work in the United Kingdom for the entire calendar year 2020. You were required to leave the United Kingdom on March 2, 2020, due to the COVID-19 emergency. You returned on August 25, 2020, and remained in the United Kingdom through December 31, 2020. You are eligible for the waiver for calendar year 2020, with respect to the period between January 1 through March 1, 2020, and from August 25 to December 31, 2020, and thus a qualified individual, if you meet the other requirements of the foreign earned income exclusion.

So, an eligible individual could potentially exclude foreign earned income and housing costs during the periods spent in the United Kingdom from January 1 to March 1, 2020 and from August 25 to December 31, 2020. Income and housing costs generated in the interim period, presumably while residing in the U.S., are not eligible for exclusion. This is problematic as some individuals may still be required to maintain a residence in the United Kingdom for the entire year and may continue to be compensated by an employer in the United Kingdom. The same compensation earned while in the United States (via a remote working scenario) may still be subject to tax in the United Kingdom. The result is that other means of double-tax mitigation need to be explored in some cases.

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