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New Foreign Earned Income Exclusion Rules



New Foreign Earned Income Rules

The bona fide residence test and physical presence test generally provide specific time requirements that apply to individuals claiming a tax exclusion for foreign-earned income. An otherwise qualified individual may still exclude foreign earned income for the period in which the individual was actually present in the foreign country even if the individual fails to meet the time requirements.

What are the bona fide residence and physical presence tests that can allow a U.S. individual to qualify for the foreign earned income exclusion?

A U.S. individual with foreign earned income must satisfy either the bona fide residence test or the physical presence test in order to be eligible to exclude all or a portion of foreign earned income from U.S. income (see Q 964).

Editor’s Note: The IRS relaxed these requirements for 2020 in response to travel restrictions put in place in response to COVID-19. An otherwise qualified individual may still exclude foreign earned income for the period in which the individual was actually present in the foreign country even if the individual fails to meet the time requirements. To qualify for relief, an individual must establish (1) he or she must have established residency, or have been physically present in either: China on or before December 1, 2019, or any other foreign country on or before February 1, 2020 and (2) the individual must have departed either: China (excluding Hong Kong and Macau) between December 1, 2019, and July 15, 2020, or any other foreign country between February 1, 2020, and July 15, 2020 and (3) individual would have met the requirements of either the bona fide residence test or the physical presence test, but for the COVID-19 emergency.[1]

An individual may use the “bona fide residence test” to qualify for the exclusion if the individual is either (a) a U.S. citizen or (b) a U.S. resident alien who is a citizen of a country with which the U.S. has an income tax treaty in effect. The bona fide residence test, as the name suggests, is met if the individual has established a residence in a foreign country. The length of the individual’s stay and the nature of employment are factors considered in determining whether the individual has established a residence in a foreign country, but are not determinative—all of the facts and circumstances of the particular situation must be taken into account.

The IRS has provided bright-line guidance so that the individual must reside in the foreign country for an uninterrupted period that includes an entire tax year, though every individual that resides in a foreign country for at least an entire tax period is not automatically considered to have established a residence.[2]

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William Byrnes

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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