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04.27.20

Avoiding U.S. tax residence during COVID-19 travel restrictions

BY , Jay D. Rosenbaum

Many of us have found ourselves severely restricted in our movements due to COVID-19. For non-U.S. persons who otherwise would avoid exposure to U.S. taxes, the inability to leave the country could present significant challenges, and even potential exposure to U.S. income and capital gains taxes on a worldwide basis. Canceled flights, stay-at-home orders, closed borders, and quarantines all could upend important tax planning. Even for those who are permitted to travel, they may feel unsafe doing so due to age, underlying medical conditions, or observance of social distancing measures. Recognizing the potential impact of these challenges to those whose U.S. tax status is dependent on day counts, the IRS recently issued guidance in the form of Revenue Procedure 2020-20.

By way of background, people who are not otherwise resident in the U.S. for income tax purposes due to U.S. citizenship or status as permanent resident (so-called "green card" holders) may be treated as U.S. tax resident as a result of "substantial presence." The substantial presence test is a legal test that is applied to determine whether a foreign nonresident individual is "in" the U.S. enough that he or she should be treated as a resident taxpayer for U.S. income tax purposes.

The general rule is that if a person is physically present in the U.S. for 31 days or more in a given year, and the sum of his or her days of presence (taking into account all of the days in the current year, 1/3 of the days in the prior year, and 1/6 of the days in the next prior year) is 183 days or more, then that person will be deemed to be a resident taxpayer for U.S. income tax purposes. In determining whether a person is substantially present, any part of a day spent in the U.S. is treated as a whole day.

As with many aspects of U.S. tax law, the substantial presence test is subject to a number of exceptions. The Revenue Procedure creates a special additional exception to the substantial presence test, called the COVID-19 Medical Condition Travel Exception. The COVID-19 Medical Condition Travel Exception is separate from and in addition to a general medical exception that provides limited opportunities to avoid U.S. tax residence under the substantial presence test.

How does the COVID-19 Medical Condition Travel Exception work?

The COVID-19 Medical Condition Travel Exception allows a foreign individual who was in the U.S. between February 1, 2020, and April 1, 2020, (a "qualified individual"), potentially to avoid becoming U.S. resident under the substantial presence test when he or she was not planning to do so. Assuming various conditions are met, the qualified individual can select a 60-consecutive-calendar-day period beginning on or after February 1, 2020, and on or before April 1, 2020 (called the "COVID-19 Emergency Period"), and not have that 60-day period count toward his or her "day count" for purposes of the substantial presence test. For example, if an alien individual was in the U.S. between February 15 and April 15 (having left the U.S. on April 15 to return home), he or she could select those days as his or her COVID-19 Emergency Period and not have those days count toward his or her 2020 day count.

It is important to note that in order to benefit from this relief, the qualified individual must have been physically present on each of the days during the COVID-19 Emergency Period. He or she also must not have been U.S. tax resident at the close of the 2019 tax year, and may not have been or become a green card holder at any point during 2020. To qualify for this exception, he or she also must not become U.S. tax resident as a result of days of presence outside of the COVID-19 Emergency Period.

What if qualified individual becomes sick with COVID-19 on top of being grounded?

He or she may claim a general medical condition exception, in addition to the COVID-19 Medical Condition Travel Exception, for medical conditions or treatments related to COVID-19, provided he or she otherwise satisfies the requirements for that exception.

Do other exceptions to substantial presence remain available?

Other exceptions to the substantial presence test do remain available during this time and, depending on circumstances, can be combined with relief under the Revenue Procedure.

As always, one should consult with his or her tax advisor regarding U.S. tax status, as well as the ability to take advantage of this relief and other exceptions that may be available to him or her.

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Author

Alexandra P. Crean

Associate

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Jay D. Rosenbaum

Partner

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