As part of the U.S. government’s response to the coronavirus pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted March 27, 2020. The Act represents one of the most significant economic aid packages enacted in the country, with support for both businesses and individuals.
A number of measures in this bill are aimed at supporting individual taxpayers in managing the financial impact as employees across the United States and across industries face unprecedented challenges.
Of the measures announced to support individuals, the rebate of up to $1,200 per individual, is likely to have the greatest impact for internationally mobile employees and businesses managing employees working overseas on assignment — both employees who have moved overseas from the United States and those who have moved to the country.
An overview of the rebate
The Act provides for qualifying individuals to receive a rebate of up to $1,200 ($2,400 for couples filing a joint tax return) rebate to be paid out by check or bank deposit. The recovery rebate is increased by $500 for each qualifying child that is not claimed as a dependent on another taxpayer’s federal tax return. These payments are to be made as soon as possible and as such, U.S. taxpayers will soon start to receive payouts with letters confirming the amounts issued sent 15 days later. For higher earners, the rebate is phased out by 5% of the excess of their Adjusted Gross Income (AGI) that is over $75,000 ($150,000 for joint filing taxpayers and $112,500 if filing as head of household).
Individuals will only qualify for the rebate if they are not regarded as a “non-resident alien,” while qualifying children must have a Social Security Number (SSN) or adoption identification number. Children who have an Individual Taxpayer Identification Number (commonly known as an “ITIN”) will not qualify for the $500 rebate.
The advance rebate will be assessed based on the AGI of taxpayers’ 2019 federal tax returns, however if it has not yet been filed (and noting the filing deadline is now extended through July 15, 2020), the 2018 return and AGI will be used in its place.
The rebate is a credit against 2020 taxes and so will be recalculated on 2020 tax returns. Where an individual’s 2020 AGI allows for a higher rebate than initially paid, the credit will be applied on their return. Where the original rebate paid was higher than that recalculated, taxpayers will not be required to repay any amount already received.
Considerations for employees on assignment to the United States
For employees who have moved to the United States on assignment, many will be concerned with whether they will qualify for the rebate and if so, will they be in a position to receive an advance payment.
a) Individuals who moved to the U.S. in 2018 or 2019
For these employees, only those who have filed a 2019 tax return (assuming they have had no personal tax filing obligation in 2018) will have a record with the Department of the Treasury that provides the information required to calculate a rebate such as their AGI, filing status and repayment contact information. Married taxpayers who arrived in the country and may file as “dual status” for 2019, non-resident for part of the year and resident for the remainder, will have filed separately from their spouse. While their return, if timely filed, will allow for the $1,200 credit to be calculated, if the spouse is not required to file or has not yet filed their tax return, they may not have made information available for their $1,200 rebate to be calculated.
Taxpayers who moved to the United States and are regarded as “non-resident aliens” for 2019 will also be unable to qualify for the credit, unless they can make an election on their return to be regarded as resident. Married taxpayers should review whether electing to be treated as full-year residents to benefit from the rebate is beneficial. For some, as non-U.S. income earned prior to their relocation would be included in taxable and increase their AGI, the election may not be beneficial if the credit is phased out or if their foreign income increases their tax liability above the benefit they receive from the rebate.
For individuals who did file in 2018 but did so as a non-resident alien, it would be advisable to file their 2019 tax return as soon as possible to ensure information is available for determining the advance rebate.
Spouses present in the United States on a dependent visa may be able to obtain an SSN and should do so in order to qualify for the credit. For taxpayers with children who cannot obtain an SSN under their visa terms, they will not qualify for the additional rebate amount.
b) Individuals who moved overseas from the United States
U.S. taxpayers working overseas will also qualify for the rebate where meet the criteria however the impact of their work overseas on their taxes could determine whether they benefit or lose out on the rebate. Individuals who claim the Foreign Earned Income Exclusion ($105,900 for tax year 2019) have the benefit of reducing income subject to U.S. federal tax. As the exclusion reduces AGI, it also means that taxpayers claiming the exclusion will have lower income for determining the amount of rebate they receive. For example, a married couple in the U.S. whose taxable employment income is $100,000 each would receive no rebate as they would earn in excess of the phase-out limit. If working overseas and claiming the FEIE, they could reduce AGI to zero and qualify for a full rebate.
Many employees working overseas for a U.S. employer may receive ongoing assignment benefits such as housing or a cost of living allowance or may have foreign taxes paid on their behalf if they are “tax equalized.” Similarly, employees who relocated overseas who received assistance with moving costs from their employer will have had these costs included in taxable income reported on their W-2. In these instances, employees may have a higher AGI than they would if they were working in the United States and so may have an AGI that phases out all or some of the rebate.
Individuals who have previously received their refund by check should also ensure they access the online portal set up by the IRS to provide direct deposit information to receive the rebate.
Above-the-line deduction charitable contributions deduction
Individuals who do not itemize deductions on their tax return can take an above the line deduction of up to $300 of charitable contributions on their 2020 tax return. Individuals working overseas should be mindful of making contributions to qualifying U.S. organizations.
Mobility policy considerations
For mobility HR, the rebate poses a number of challenging scenarios — some employees working overseas may not receive a rebate where their AGI is increased though they would have if they were still working in the United States. Others, meanwhile, may receive a rebate from which they otherwise may not have been able to benefit.
The situation is further complicated for international assignees who are “tax equalized” and maintained to the same overall tax burden they would have incurred if they had remained at home. Taxes in the country they are working in are paid by the employee on their behalf. For individuals who have moved on assignment to the United States and have their income taxes paid by their U.S. employer, the advance rebate is a credit against taxes the company is paying on their behalf.
Should employers seek to reclaim this rebate as a result or allow the employee to keep it? For employees working outside the United States who might otherwise not qualify for the rebate if working in the U.S., will the rebate be required to be repaid to the business under the terms of the employer’s tax equalization policy when their 2020 hypothetical taxes are calculated showing they would not qualify for a credit? Conversely for those employees whose AGI is increased due to taxable assignment benefits, will the company credit this against 2020 taxes next year with their tax return or advance this benefit now on a discretionary basis.
Similarly, individuals whose taxes are paid by the business while working on assignment in the United States may not personally benefit from a reduction in taxes as a result of the above the line deduction. Employers may want to address whether the resulting reduction in taxes, while limited, will reduce the employer’s costs or be passed on to the individual.
These answers to these questions may not be addressed in the assignment and tax equalization policies U.S. employers have to manage the taxes of their internationally mobile workforce, and as such, exploring each of the scenarios a business’s global workforce presents will be important. Aligned to company culture, compensation philosophy and the economic reality employers are facing, mobility HR professionals will need to tackle these questions and determine the cost to the business of the decisions they take.
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