Tax Laws are Bending, Flexing and Breaking to Deal with an Ever-Evolving Situation

As they say in the news business, Covid-19 is a “developing story,” and the adjustments being made by the U.S. Treasury department to address the unique tax issues arising as a result of the pandemic are historic. At this halfway mark of the year, with summer on the near horizon, I have compiled what I consider to be this point in time, the most critical cross-border tax stories. I have summarized three issues, along with the IRS reference documents. If you or your clients have a compelling and unique tax circumstance that has arisen due to the Coronavirus pandemic, we would appreciate your sharing the story with us. And, please feel free to share your comments in an email, and we will publish them.

Issue #1: The Land of Lost Deductions: U.S. Citizens and Permanent Residents Living or Working Abroad in the Time of Covid

Summary:

Under normal circumstances, U.S. citizens or residents living abroad can qualify to exclude a maximum dollar amount from reported income made overseas. The amount is adjusted upward annually to account for inflation. In 2019 the maximum deduction was $105,900. In 2020 it is $107,600. This is called the foreign earned income exclusion. In addition, those who qualify can also claim an exclusion or deduction from gross income for foreign housing.

Question: What happens when the U.S. individual has to leave their foreign place of business and/or residence because of the Covid-19 pandemic? Qualified individuals must normally prove uninterrupted foreign residence for a minimum of 330 days.

Answer: The IRS has provided relief under these extenuating circumstances. If living/working in China, the individual would have to prove presence in the country on or before December 1, 2019. For qualifying individuals living in other locales, they must prove their foreign presence commenced on or before February 1, 2020.  Therefore, individuals who under normal circumstance would have expected to meet the IRS’ 330-day continuous presence requirement while also meeting the other requirements for qualification, are permitted to use any 12-month period to satisfy the “qualified individual” requirement.

Reference:

https://www.irs.gov/pub/irs-drop/rp-20-27.pdf

Issue #2: Non-Resident Aliens and UTSBs Caught in the U.S. Government’s “Substantial Presence” Trap Due to the Covid-19 Outbreak

Summary:

Here we find a situation occurring on U.S. territory. To wit: a foreign visitor or business person has overstayed their allowance of tax-exempt visitor time, due to complications arising from the Coronavirus pandemic. The situations that ensued for those caught up in the quarantine were varied and often tragic. See my previous blog posts on the subject:

https://iwtas.com/the-perfect-storm-of-timing-tragedy-and-tax-law-nras-and-covid-19/

https://iwtas.com/breaking-news-update-u-s-department-of-treasury-offers-tax-relief-to-nras-remaining-in-usa-during-covid-19-pandemic/

A “Covid-19 Emergency Period” was established by the IRS. It begins on or after February 1, 2020 and ends on or before April 1, 2020.

The IRS has an FAQ page covering the myriad issues. (Link below.) Note that in some cases, filing preemptive individual or business taxes even if not required may actually result in gains, as treaty-based relief and statute of limitation issues could be claimed.

Reference:

https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions

Issue #3: Transfer Tax Extensions

Summary:

Many categories of Estate, Gift, and Trust tax returns were granted filing extensions of July 15. 2020 due to the Covid-19 pandemic. The extension affects many required forms. For a full list see the IRS publication below. For a summary, click here.

Reference:

https://www.irs.gov/pub/irs-drop/n-20-23.pdf

Also see our previous blog post: https://iwtas.com/top-tips-for-international-tax-clients-during-the-covid-19-crisis/

If you, a colleague or client need help with any of the above issues, do not hesitate to reach out.

Contact us here.