As we have discussed in prior U.S. Tax Tips, the determination of residency in the United States is a question of fact. If you are not a U.S. citizen nor a lawful permanent resident (i.e. a green card holder) you will be a U.S. tax resident under U.S. domestic law if you satisfy the substantial presence test. Under this test, a nonresident alien will become a U.S. resident if they are physically present, and those days are not statutorily excluded, in the United States (i) over 182 days in the current year or (ii) over 182 days under the three year rolling average test. The total number of days, as computed under the three year rolling average test, equals
The number of days in the current year
(the number of days in the first prior year x 1/3)
(the number of days on the second prior year x 1/6).
If a nonresident alien becomes a U.S. resident under U.S. domestic law they would be required to file a U.S. income tax return and, potentially, pay U.S. taxes. When a person is considered a U.S. resident it may also be possible, however, to rely on the residency tie-breaker rules of a bilateral tax convention.
Because of the current COVID-19 pandemic many nonresidents are stuck in the U.S. This may be due to border closures or airlines suspending international flights, etc. Absent any statutory relief this unexpected time in the United States would count towards meeting the substantial presence test as the nonresident alien is physically present in the United States.
On Tuesday, April 21st, the IRS issued Rev. Proc. 2020-20 and Rev. Proc. 2020-27 and a list of FAQs. Under this guidance the IRS stated that travelers who meet certain requirements won’t be subject to taxes if they are stuck in the U.S. because of virus-related restrictions.
Under Rev. Proc, 2020-20, a nonresident alien can choose a 60 consecutive day period beginning on or after February 1, 2020, and on or before April 1, 2020, while they were “stuck” in the United States. This period is defined as the COVID-19 Emergency Period.
A nonresident alien, who intended to leave the United States during the individual’s COVID-19 Emergency Period, but was unable to do so due to COVID-19 Emergency Travel Disruptions, may exclude the individual’s COVID-19 Emergency Period for purposes of applying the substantial presence test. These days will be considered to be a Medical Condition Travel Exception. Such days are statutorily excluded (not counted) when determining the days of physical presence under the substantial presence test.
In addition, an individual’s eligibility for treaty benefits with respect to income from employment or the performance of other dependent personal services within the United States, any days of presence during the individual’s COVID-19 Emergency Period on which the individual was unable to leave the United States due to COVID-19 Emergency Travel Disruptions, will not be counted. .
Similarly U.S. persons, who live abroad (their tax home is bona-fide outside of the United States), may temporarily be stuck in the United States. To qualify for the foreign earned income (FEI) exclusion, under IRC §911, the taxpayer must be resident in the foreign country for a certain number of days each year.
Rev. Proc. 2020-27 states that qualification for gross income exclusions won’t be impacted by days spent away from a foreign country due to travel restrictions. The relief applies to foreign individuals who had reasonably expected to meet the threshold requirements during 2019 or 2020, and is valid through July 15, 2020, unless further extended by Treasury.
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