Relaxing Substantial Presence Test for Foreign Nationals for COVID-19 Medical Emergency

Foreign nationals who might otherwise be considered residents of the U.S. under the substantial presence test may exclude up to 60 days of presence in the U.S. in order to be taxed as Nonresident Aliens. This may relieve individuals with prolonged, unexpected stays in the U.S. from taxation of worldwide income and international entity and asset reporting. The 60 days exclusion may begin during the period from February 1, 2020 through April 1, 2020.  Tax relief is also provided when determining qualification for certain tax treaty relief.

A brief review of the general taxation rules and determination of residence will enhance understanding of the exception requirements. A foreign national living and working in the U.S. may either be considered a Nonresident Alien or a Resident Alienfor U.S. tax purposes. Nonresident Aliens are taxed on U.S. sourced income only, however, Resident Aliens are taxed on worldwide income and may have international income reporting requirements for foreign banks, entities and assets. Therefore, it is critical to understand whether an individual will be considered a U.S. resident for tax purposes.

A foreign national is considered a nonresident alien if they do not meet the requirements to be considered a resident alien under either the Permanent Resident (Green Card) Test or the Substantial Presence Test as outlined by the Internal Revenue Code below:

  • A foreign national who has Permanent Resident (Green Card) status is a US tax resident from the first date of presence in the US with the green card and will continue to be a resident until the status is revoked or the green card is surrendered.
  • A foreign national is considered a US resident for tax purposes if the Substantial Presence Test is met for the calendar year. To meet the test, the taxpayer must be physically present in the US on at least:
    • 31 days during the current year and
    • 183 days during the 3year period that includes the current year and the 2 years immediately before that, counting:
      • All the days present in the current year, and
      • 1/3 of the days present in the first year before the current year, and
      • 1/6 of the days present in the second year before the current year.

The IRS recognizes the global effects of COVID-19 and the related travel restrictions and is thus allowing up to 60 days of U.S. presence to be excluded for eligible individuals who did not anticipate meeting the Substantial Presence Test. The 60-day period for excluding days will begin during the period from February 1, 2020 through April 1, 2020.

To discuss the impact these disruptions could have on you or your employees’ income tax reporting requirements with an Aprio Tax expert, click here.

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