May 27, 2020
Because of disruptions caused by the global COVID-19 pandemic, many foreign nationals who normally reside abroad, as well as U.S. citizens intending to live elsewhere, have found themselves stuck here. While federal tax law might be the farthest thing from many people’s minds as they hunker down during a worldwide public health crisis, the amount of time international travelers spend in the U.S. directly affects their tax obligations. The IRS has issued guidance regarding waivers and exemptions for international travelers who might inadvertently incur tax obligations or lose tax benefits.
Avoiding Accidental U.S. Residency
The tax liability of individuals in the U.S. who are not U.S. citizens or permanent residents depends on whether they are resident or nonresident aliens. Resident aliens must pay federal income tax in much the same manner as U.S. citizens. A person can become a resident alien if they meet the “substantial presence test” described in § 7701(b)(3) of the Internal Revenue Code (IRC):
– They have been in the U.S. for at least 31 days during the current calendar year; and
– The sum of the number of days present in the current year, one-third of the days present in the preceding year, and one-sixth of the days in the year before that is at least 183.
The IRS is granting Medical Condition Exceptions to people who “intended to leave…but [were] unable to do so because of a medical condition” that kept them here. Up to sixty days spent in the U.S. due to “COVID-19 Emergency Travel Disruptions” will not count towards the total used to determine resident alien status.
Foreign Earned Income Exclusion
As a general rule, U.S. citizens must pay federal income tax on all income they earn around the world, even if they do not live in the U.S. Section 911(a) of the IRC allows U.S. citizens living abroad to exclude some or all income earned from foreign sources from their taxable income. To be eligible, § 911(d)(1) states that they must have been a “bona fide resident of a foreign country” for at least a year, or been present in a foreign country for at least 330 days of the past twelve months.
The IRS is waiving these time requirements for people “who reasonably expected to meet the eligibility requirements,” but failed to do so because of travel disruptions related to COVID-19. This applies to U.S. citizens or residents who had to leave China on or after December 1, 2019, or any other country on or after February 1, 2020, but before July 15, 2020.
Criteria for Engagement by Foreign Nationals and Corporations in a U.S. Trade or Business
Engaging in a U.S. trade or business (USTB) affects the tax liability of nonresident aliens and foreign corporations. The IRS has announced that it will not consider up to sixty days of business activities conducted in the U.S. to count as engaging in a USTB, but only if it can be shown that those activities “would not have been performed in the United States but for COVID-19 Emergency Travel Disruptions.” This sixty-day period must have begun on or after February 1, 2020, but before April 1.
If you need assistance with your taxes, the tax advisors at the Enterprise Consultants Group are available to answer your questions and discuss your concerns. Please contact us online or at (800) 575-9284 today to schedule a consultation with a member of our team.