United States – Foreign Earned Income Exclusion Requirements Waived for Several Countries

Context

The Revenue Procedure provides that the Treasury Department, in consultation with the Secretary of State, has determined that for tax year 2021 war, civil unrest, or similar adverse conditions precluded the normal conduct of business in the listed countries.  As anticipated, this Revenue Procedure adds Afghanistan to the list of countries for which the eligibility requirements of section 911(d)(1) are waived for tax year 2021, following the U.S. troops withdrawal in 2021.  Similar to tax year 2020, Iraq is also on the list for 2021.

Qualifying for Relief

To qualify for this relief, an individual must have established residency, or have been physically present, in the foreign country on or before the above applicable dates.  Individuals seeking to qualify for the FEIE because they could reasonably have been expected to have been present in a foreign country for 330 days but for war, civil unrest, or similar adverse conditions, and have met the other requirements for qualification, may use any 12-month period to meet the qualified individual requirement.

For example, consider an individual who was present in Afghanistan on January 1 through April 27, 2021, who establishes that he reasonably expected to work in Afghanistan for the entire calendar year.  If the individual departed Afghanistan on April 27, 2021, due to war, civil unrest, or similar adverse conditions, that individual will be considered to have met the physical presence test despite not having been present in Afghanistan for 330 days.  He will be considered a qualifying individual for the periods of January 1–April 27, 2021, assuming the other requirements for qualification under section 911 are met. 

KPMG NOTE

The ability to claim the FEIE is an important tax planning and cost mitigation element of a long-term outbound international assignment from the United States.  Where the employee is tax equalized by the employer, the FEIE may help mitigate the overall tax cost of a U.S.-outbound assignment to the employer, and will have been factored into 2021 budget forecasts, tax projections, tax equalization payments, and other cost and cash-flow projections.

Rev. Proc. 2022-18 provides relief for individuals and employers who have had to cut assignments short as a result of war, civil unrest, or similar adverse conditions.  However, assignees and their employers will need to establish that the individual could reasonably have been expected to meet the eligibility requirements for the FEIE if the individual had not been required to leave the foreign country due to war, civil unrest, or similar adverse conditions.  In addition, an individual must be able to demonstrate that he or she established residency, or was physically present, in the foreign country on or before the applicable dates.  Documentation of the original intended assignment length and location, reason for the change in assignment length and location, date of the change, any ongoing amendments to the assignment terms, and travel records should be maintained and regularly updated as the situation evolves.

If you have any questions or concerns about how Rev. Proc. 2022-18 might apply to any of your assignees who left their assignment country earlier than anticipated due to war, civil unrest, or similar adverse conditions, consider consulting with your qualified tax professional or your usual KPMG contact.