IRS Issues Inflation Adjusted Amounts for International Provisions
In October 2020, the IRS issued Rev. Proc. 2020-45. This document contains annual inflation adjustments for many tax provisions, including the foreign earned income and housing exclusion and expatriation figures.
Section 911 - Foreign earned income and housing exclusion
Section 911 of the Code allows U.S. individuals working abroad to exclude from taxation a certain amount of foreign earned income each year, plus a housing amount. The maximum amount of foreign earned income that is eligible for the exclusion is adjusted annually for inflation.
For 2021, the foreign earned income exclusion amount will be $108,700. The chart below shows the indexed amounts for the most recent five years.
Limitation on Foreign Earned Income
To qualify for the foreign earned income exclusion and related housing benefits, a U.S. citizen or resident must meet the definition of a qualified individual. A qualified individual is defined as:
- Individual is physically present in a foreign country for at least 330 days during any 12-month period or is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year, and
- Individual’s tax home is in a foreign country (i.e., principal or regular place of business).
The benefits under section 911 are only applicable for the period in which the taxpayer meets the foreign tax home requirement, while also 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 Code imposes a mark-to-market tax on the fair market value of all assets owned by an individual who relinquishes their U.S. citizenship or long-term residency status to avoid U.S. taxation. These high net-worth individuals are considered “covered expatriates.”
In 2021, an individual with an average net income liability of more than $172,000 for the five tax years prior to expatriation will qualify as a “covered expatriate.” The 2020 indexed amount was $171,000.
An individual can also qualify as a “covered expatriate” if their net worth exceeds $2 million or they’ve failed to comply with U.S. Federal tax obligations.
The calculation of the mark-to-market tax requires that all property of a “covered expatriate” is deemed sold the day before the expatriation date. When calculating the gain that arises from the deemed sale, the taxpayer is provided a statutory exclusion amount that is indexed for inflation each year. The 2021 exclusion amount is $744,000 (up from $737,000 in 2020).
The impact of these rules is illustrated in the following example. Assume Jack is a U.S. citizen who has resided in the United States his entire life. A few years ago, Jack established an online business that made him an instant millionaire. For the past five years, Jack’s annual net income liability has been $175,000 or more. In 2021, Jack decides to relinquish his U.S. citizenship and move to Barbados. The fair market value of his assets total $3.5 million on the date before his expatriation. Jack’s annual net income liability over the past five years exceeds the $172,000 threshold for 2021, which qualifies him as a covered expatriate. The gain on the deemed sale of his assets ($3.5 million - $744,000) will be subject to U.S. tax regardless of the fact he relinquished his U.S. citizenship and moved to Barbados.
Tara Fisher has been practicing international tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh, and American University in Washington D.C. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.