With Hurricane Irma impacting some small Caribbean nations, American citizens residing and working may not be aware how natural disasters, displacements and evacuation – particularly one bringing them back home to the US – could affect their ability to claim expat tax benefits.
Physical Presence and Income Exclusion
When a natural disaster occurs in your country of residence, an evacuation or general displacement from your country of residence may have an impact on a key element of your US tax return: your foreign income exclusion provision.
As an American living abroad, you are expected to pay taxes on both domestic and foreign-earned income alike. As a way to reduce double taxation, there are, however, one of two residency tests expats can use to reduce their taxable income by a certain amount (up to $102,700 in 2017). Passing either of these residency tests also allows you to be exempt from the Affordable Care Act’s individual mandate along with other benefits.
The Physical Presence Test
If a US citizen lives in a foreign country (or countries) for 330 days during a 12-month period, they will qualify for expat income exclusion benefits because of the physical presence test. With the physical presence test, you can decide when the 12-month period begins and ends based on your circumstances. You can also spend up to 30 days in the US per year and still qualify.
The Bona Fide Residence Test
There is also another residence test available to expats who may not find the strict limit of days spent stateside to be either practical or desirable. Under the bona fide residence test, an expat must demonstrate that they lived in a foreign country (or countries) for a full calendar year and have the intention of continuing to live abroad. Under the bona fide residence test, you cannot arbitrarily choose your 12-month period, but you do have the flexibility to go back to the US for as long as you please.
Implications for Natural Disasters and Crises
Each year, the IRS publishes a list – determined by the Secretaries of State and Treasury together – of countries that are exempt from the bona fide and physical presence tests.
Normally, this list will primarily include countries with political instability, but the language of “war, civil unrest or similar adverse conditions” allows for flexibility to include countries affected by natural disasters on the list as well. For example, the 2010 list did allow US taxpayers living in Haiti to waive their residence requirement, and the 2004 list did the same for taxpayers affected by the tsunami in Indonesia and nearby countries. It remains to be seen, however, if this waiver will apply to expats living in countries affected by Hurricane Irma with next year’s list.
Tax Implications of Natural Disasters
If you are living abroad in a country affected by Hurricane Irma, the residence test you choose may affect your ability to claim income exclusion in the case you have to evacuate and return to the US for safety.
Our co-founder, David McKeegan, outlines the risk an expat needing to evacuate may face under the physical presence test:
Someone who had already spent 30 days in the U.S. prior to the Hurricane and then evacuated to the U.S. for one week would have spent fewer than 330 days outside of the U.S. and may lose this benefit.
In other words, the days spent inside the United States could count against expats under the physical presence test. However, the flexibility in choosing your 12-month period of physical presence may come in handy depending on your unique circumstances.
For taxpayers under the bona fide test, a temporary evacuation to the United States would not negatively impact your ability to seek income exclusion. The advantage of the bona fide test in this respect is that there is no strict limit on the time you need to spend inside the country. If the damage caused by the storm forces you to relocate entirely back to the US, however, then your eligibility for bona fide residency would end.
Stay in the Know
When it comes to Americans affected by natural disasters like Hurricane Irma, it’s important to know that the IRS will try to help you during times of difficulty. Once you’ve made it to safety, you can refer to this page outlining the agency’s latest decisions, and here you’ll find more information about how losses and non-insured expenses related to the event can be claimed on your return.
Have Specific Questions Related to US Taxes?
We can help! Our dedicated team of CPAs and IRS Enrolled Agents have specific expat tax expertise to help Americans abroad navigate their US taxes in a way that makes sense for their individual situation – contact us today.