Are you a U.S. citizen or Green Card Holder? Were you living and working in China prior to December 1, 2019 or in any other country prior to February 1, 2020? If you’ve returned to the U.S. because of the COVID-19 emergency, there is some good news from the IRS.

Even though you have returned to the U.S., you still may be able to exclude some or all of your non-U.S. employment or self-employment income from U.S. taxation.

Background

As a U.S. citizen or Green Card holder who is normally living and working outside the U.S., you may be a “qualified individual” who exclude some or all of your employment or self-employment income from taxation in the U.S. if you meet either the:

• Bona Fide Residence Test - you are resident outside the U.S. for a uninterrupted period that covers a complete U.S. tax year; or
• Physical Presence Test – you are based outside the U.S. for at least 330 days in any 12 month period.

In normal situations, being in the U.S. for an extended period can prevent you meeting either the Bona Fide Residence or Physical Presence tests. However, IRS Revenue Procedure 2020-27 provides some relief if you have had to return to the U.S. because of Covid-19.

IRS Revenue Procedure 2020-27

In IRS Revenue Procedure 2020-27, the IRS have waived the time requirements outlined in the Bona Fide Residence and Physical Presence tests if you would have reasonably expected to be a qualified individual had you not returned to the U.S. The ruling only applies if you were physically present or had established residency in:

• China (excluding Hong Kong and Macau) before December 1, 2019
• Any other foreign country before February 1, 2020 and you moved back to the U.S. because of the Covid-19 Emergency before July 15, 2020 though this date may be extended.

The impact of IRS Revenue Procedure 2020-27 is best shown in the following example:

Bona Fide Residence Test

Sheila, a U.S. citizen, moved to London, UK on December 10, 2019 and was expecting to be living and working there for 3 years. On March 15, 2020, Sheila’s employer brought her back to the U.S. because of the Covid-19 Emergency. Sheila returns to London, UK on August 25, 2020 and stays for the remainder of the 2020 calendar year.

Sheila could exclude from U.S. taxation her employment income earned outside the U.S. for the periods December 10, 2019 to March 15, 2020 and August 25, 2020 to December 31, 2020 as:

• Sheila was physically present or established her residency in the UK before February 1, 2020; and
• Sheila reasonably expected to meet the eligibility requirements but had to return to the U.S.

If Sheila had moved to the UK after February 1, 2020, she would not be covered by IRS Revenue Procedure 2020-27 and would not be able to exclude her employment income from U.S. taxation.

Physical Presence Test

Tom, a Green Card holder, moved to Shanghai, China on November 1, 2019 and was expecting to be living and working there for 12 months. On December 15, 2019, Tom returned to the U.S. because of the Covid-19 Emergency.

Tom could exclude his foreign employment income for the period November 1, 2019 to December 15, 2019 as:

• Tom was physically present or established his residency in China before December 1, 2019; and
• Tom reasonably expected to meet the eligibility requirements but had to move to the U.S.

If Tom had moved to China after December 1, 2019 he would not be covered by IRS Revenue Procedure 2020-27 and would not be able to exclude his employment income from U.S. taxation.

How we can help

If you are a U.S. citizen or Green Card Holder who has returned to the U.S. because of the Covid-19 Emergency and you want to know if you can still exclude your employment or self- employment income from U.S. taxation, please contact the KLR International Tax Services Team. We are here to provide you with the peace of mind that comes from knowing how you will be treated for U.S. tax purposes and from having your U.S. tax affairs appropriately managed.

Visit our Coronavirus Resource Center for more information.