By: Donna Holm
Everyone has been affected in some way by COVID-19, no matter where they may be in the world. U.S. citizens who work abroad or perhaps foreign persons that have been working in the U.S. face some additional financial challenges relating to income tax. The IRS has provided some updates for cross-border employees that may provide some relief.
What happens when your employees get stuck away from home and family? What happens to the employee who can’t get home or perhaps was sent home before the assignment was to end? Thanks to government shelter-in-place directives, social distancing, canceled flights, and other travel disruptions, some very real problems emerged.
The IRS has responded with two Revenue Procedures to help combat the punitive taxes that could result during this global outbreak. Employers should take note if either situation applies to their workforce, in addition to the self-employed who may work around the globe and are subject to U.S. taxes.
Revenue Procedure 2020-20 provides some relief to non-resident aliens working in the U.S. who did not intend to be here long enough to meet the substantial presence test subjecting them to U.S. income tax on a worldwide basis, but due to COVID-19, may have been stranded in the U.S. In this situation, those individuals would be forced into filing U.S. income taxes as resident aliens. A “Medical Condition Travel Exception” has been created in order to exempt 60 consecutive days spent in the U.S. between February 1, 2020 and April 1, 2020 (which may be extended). Those affected individuals did not have to contract the virus in order to use this exemption and will therefore be treated as not present in the U.S. on days where the individual intended to leave but was unable to do. The exemption may be claimed on Form 8843 and must be filed by the due date of Form 1040-NR (whether or not required to file Form 1040-NR).
Revenue Procedure 2020-27 provides relief to US citizens or green card holders that are working abroad and planned to use the Foreign Earned Income Exclusion (FEIE). This exclusion exempts up to $107,600 (or $105,900 for 2019) of compensation earned while working outside of the U.S. Due to the impact of the virus, these employees may have been sent home ahead of the travel restrictions that were imposed. This revenue procedure will provide relief for those who failed to meet the time limits required for living and working abroad to apply the exclusion. Qualified individuals will still be able to claim the FEIE on their 2019 or 2020 tax return if they expected to meet the eligibility requirements but failed to do so because they departed the foreign country as of February 1, 2020 through July 15, 2020 (which may also be extended). Note there is an earlier exemption for those present in China (exclusive of Hong Kong and Macau) as of December 1, 2019.
It is important to note that many countries have treaties with the U.S. that provide specific treaty benefits with respect to income from dependent personal services performed in the U.S. Affected individuals may be impacted as a result of various unintended consequences of COVID-19.
HPG has the expertise to help maneuver the quickly changing tax landscape affecting cross-border employees. In order to properly apply the above procedures, the requirements must be met. Please contact us for assistance.