Expat tax break could net larger COVID-19 relief payment

May 23, 2020

The COVID-19 crisis is global, so it's no surprise that actions by U.S. lawmakers to help taxpayers also have some decidedly global complications.

And in some cases, it could work out well for U.S. taxpayers who are living and working in other countries.

Worldwide earnings, U.S. taxes: Even though these folks no longer live in the United States, they still pay U.S. taxes.

America's tax system for individuals is, for the most part, a worldwide one. That means that if you're an American living and working abroad, the Internal Revenue Service still gets a part of your income as U.S. taxes.

Despite tax treaties and some accommodations made in the tax code, it's still a cumbersome system for expatriate Americans. The coronavirus pandemic, however, has turned the tables a bit.

Some wealthy expatriates could potentially benefit from an apparently unforeseen quirk in the way the Coronavirus Aid, Relief and Economic Security (CARES) Act economic impact payments are being provided, writes Helen Burggraf, editor of American Expat Financial News Journal.

The quirk is use of the Foreign Earned Income Exclusion (FEIE). This tax break, adjusted annually for inflation since that fiscal phenomenon is global, allows U.S. workers abroad who meet certain requirements to legally avoid paying U.S. tax on some of their foreign wages.

For 2020, the amount is $107,600. For the 2018 or 2019 tax years which are being used by the is IRS to calculate advance payment of the COVID-19 economic impact payment (EIP), the FEIE amounts were, respectively, $103,900 and $105,900.

Burggraf notes that the FEIE would benefit stimulus-payment-qualifying individuals whose adjusted gross income (AGI) is $75,000 (U.S. dollars) or more. Earn more than that and the EIP is reduced incrementally and eventually eliminated.

That's because expatriates who use FEIE are able to exclude a portion of their overseas earnings from their total income before they calculate their ultimate AGI for a tax year. For COVID-19 payments, that could make a difference in the worldly U.S. taxpayers' relief amount.

Foreign income and COVID-19 relief: Basically, by using the FEIE, expats with higher incomes that might otherwise reduce or disqualify them from an EIP (or at least the maximum amount) if they were making the money within the U.S. borders, still get the relief.

"So it would be theoretically possible for an expat whose actual AGI is $180,000 to receive the full maximum CARES Act payment of US$1,200, even though his homeland counterpart would cease to receive any CARES Act payment at all once their income for the 2019 tax year totaled US$99,000," John Richardson, a Toronto-based lawyer and citizenship and cross-border tax expert, told the online expatriate news source.

That quirk and Burggraf's more detailed discussion of it for the American Expat Financial News Journal earns this weekend's Saturday Shout Out. A second more personal shout out also goes to my #TaxTwitter pal Austin CPA Brian Streig for bringing the article to my attention.

Bon voyage and bon taxes!

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Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

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