Tax Residency issues for foreign nationals in the US during COVID-19

Following current travel restrictions, foreign nationals who are stuck in the US with the inability to catch a flight home are able to extend their ESTA for a further 60-day period (see article on Satisfactory Departure). However, this is a solution which regards immigration. What are its implications on tax residency? Many travellers make strategic use of their ESTA in order to avoid tax residency in the US, by limiting their time in the country. But if these individuals are unable to go back to their home country, they may need to analyse the tax-related consequences.

How is tax residency determined?

If foreign nationals aren’t US citizens, their income tax residency is defined based on the amount of time they have spent in the United States. However, this isn’t limited to the number of days in the current year, but includes a percentage of the number of days the individual was present in the US in the previous two years. To be treated as a resident of the United States, an individual will have accumulated the following amount of days on US soil: 31 days during the calendar year (starting in January); 183 days during the current year and the two preceding years (1/3 of days in the preceding year are counted, and 1/6 in the second preceding year). The day-count which defines an individual’s eligibility for tax residency in the US is calculated through a substantial presence test.

Are there any exceptions to the substantial presence day count for tax residency?

There may be exceptions to the days counted in the substantial presence test. An example may be if an individual was unable to leave the United States for a long period of time due to a health problem which arose whilst on US soil. The IRS has recently issued new guidelines which includes exceptions related to COVID-19 travel disruptions. It is extremely important to thoroughly check these guidelines, as they might not apply to everyone. Professional aid is recommended to claim an exemption.

How to claim a tax residency exemption?

As of April 21st, the IRS issued a special document, the Revenue Procedure 2020-20, stating how an individual may claim a ‘COVID-19 Medical Condition Travel Exception’. This form will allow an exception of 60 calendar days from the substantial presence count, beginning on or after February 1st 2020, and on or before April 1st 2020. It will be presumed that they intended to leave the United States in that period and weren’t allowed to do so.