In October 2020, the Internal Revenue Service (IRS) released Rev. Proc. 2020-45, a crucial document outlining annual inflation adjustments for various tax provisions, with a specific focus on international aspects such as the foreign earned income and housing exclusion and expatriation figures. Understanding these adjustments is paramount for individuals and tax professionals navigating the complexities of international taxation. Let's delve into the key provisions affected by these adjustments and explore their implications.
Section 911: Foreign Earned Income and Housing Exclusion
Section 911 of the Internal Revenue Code provides a mechanism for U.S. individuals working abroad to exclude a specified amount of foreign earned income annually, coupled with a housing amount. The maximum eligible amount for exclusion undergoes annual adjustments to account for inflation.
2021 Adjusted Exclusion Amount:
For the tax year 2021, the foreign earned income exclusion amount stands at $108,700. To provide context, the following chart illustrates the indexed amounts for the past five years:
Limitation on Foreign Earned Income
To qualify for the foreign earned income exclusion and related housing benefits, an individual must meet the definition of a qualified individual, which includes:
- Being physically present in a foreign country for at least 330 days during any 12-month period or being a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year.
- Having a tax home in a foreign country, which is the principal or regular place of business.
These benefits are applicable only during the period in which the taxpayer satisfies the foreign tax home requirement while meeting either the bona fide foreign resident test or the 330-day physical presence test.
Section 877A: Expatriation Mark-to-Market Tax
Section 877A of the Internal Revenue Code imposes a mark-to-market tax on the fair market value of assets owned by individuals who renounce their U.S. citizenship or long-term residency status to evade U.S. taxation. Such individuals are classified as "covered expatriates."
2021 Adjusted Criteria:
In 2021, an individual with an average net income liability exceeding $172,000 for the five tax years preceding expatriation qualifies as a "covered expatriate." The 2020 indexed amount for this criterion was $171,000. Alternatively, an individual can also become a "covered expatriate" if their net worth surpasses $2 million or if they fail to comply with U.S. Federal tax obligations.
Mark-to-Market Tax Calculation:
The mark-to-market tax calculation necessitates deeming all property of a "covered expatriate" as sold the day before expatriation. When determining the gain arising from this deemed sale, a statutory exclusion amount is provided, adjusted annually for inflation. For the tax year 2021, this exclusion amount stands at $744,000, up from $737,000 in 2020.
To illustrate the impact of these rules, consider Jack, a U.S. citizen and millionaire entrepreneur. Having met the average net income threshold over the past five years, Jack decides to relinquish his U.S. citizenship in 2021. The fair market value of his assets on the day before expatriation is $3.5 million. Despite moving to Barbados, Jack's status as a covered expatriate subjects the gain on the deemed sale of his assets ($3.5 million - $744,000) to U.S. tax obligations.
About Tara Fisher
Tara Fisher, with over 20 years of experience in international tax, is a seasoned professional whose background includes roles at the U.S. Congress Joint Committee on Taxation, PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. As a licensed CPA with undergraduate and graduate degrees in accounting from the University of Virginia, she brings a wealth of expertise to the field.
Note: The content presented in this article serves informational purposes only and should not be considered tax advice. For advice relevant to your specific situation, it is recommended to consult with a qualified tax advisor.
In navigating the intricate landscape of international tax provisions, staying informed about inflation-adjusted amounts is paramount. These adjustments not only impact individuals working abroad but also expatriates considering a change in residency status. As the tax landscape evolves, vigilance and understanding become invaluable tools for both taxpayers and tax professionals.