On March 13, 2020, the President issued a proclamation declaring a national emergency regarding the global outbreak of the COVID-19 virus (the “COVID-19 Emergency”). Subsequently, FEMA approved all states and the District of Columbia for major disaster declarations to provide federal emergency assistance. The Federal Government and state governments have also taken unprecedented preventative and proactive measures to slow the spread of COVID-19 by instituting stay-at-home orders and significantly curtailing travel. These restrictions have caused concerns regarding the application of the U.S. tax residency rules to nonresidents who are unable to leave the United States due to the state of emergency. In response, Treasury and the IRS issued Rev. Proc. 2020-20 to provide important relief under the substantial presence test for nonresidents unable to travel due to the COVID-19 Emergency.
The U.S. Taxation of Nonresidents
For U.S. federal income tax purposes, individuals who are neither U.S. citizens nor residents of the United States are taxed only on income effectively connected with a U.S. trade or business and other U.S. source income. If required to file a U.S. federal income tax return, a U.S. nonresident must file Form 1040-NR (U.S. Nonresident Alien Income Tax Return). Conversely, U.S. residents must file Form 1040 (U.S. Individual Income Tax Return), pay taxes on their worldwide income, and are subject to the same attribution and disclosure requirements under U.S. federal tax law as U.S. citizens. As a result of the potentially onerous consequences of U.S. tax residency, U.S. nonresidents often carefully monitor the duration of their stays in the United States to avoid being treated as residents for federal tax purposes under the substantial presence test described below.
Noncitizens are treated as U.S. tax residents under section 7701(b) of the Internal Revenue Code if (1) they are a lawful permanent resident of the United States under immigration law at any time during such calendar year, (2) they satisfy the substantial presence test under section 7701(b)(3), or (3) they make a qualifying first-year election under section 7701(b)(4) to be treated as such.
Substantial Presence Test
A nonresident individual satisfies the substantial presence test if:
- the individual is present in the United States for at least 31 days during the calendar year; and
- the sum of (i) the number of days of presence during the calendar year; (ii) one-third of the number of days of presence in the preceding calendar year; and (iii) one-sixth of the number of days of presence in the second preceding calendar year totals 183 or more.
While this test requires precise counting of an individual’s days of presence in the United States, rounding up is not required for fractional days.
For example, assume that a nonresident individual was present in the United States for 120 days in 2018 and 90 days in 2019. Thus, for 2020, an individual may be present in the U.S. for 132 days without triggering the substantial presence test. (2018: 120 ÷ 6 = 20 days) + (2019: 90 ÷ 3 = 30 days) + (2020: 132) = 182 days.
Statutory Exceptions to the Substantial Presence Test
Although nonresidents admitted to the United States under certain visa statuses (e.g., diplomats, students, teachers, trainees, etc. ) may qualify for exemption, two important statutory exceptions exist to the substantial presence test, the closer connection exception and the medical condition exception. The closer connection exception is available to an individual who is present in the United States for less than 183 days during the current taxable year, if the individual has a tax home in a foreign country and has a closer connection to such foreign country than to the United States. To assert the closer connection exception, an individual must file Form 8840 (Closer Connection Exception Statement for Aliens).
The medical condition exception provides that a nonresident individual is not treated as present in the United States on days that the individual intended to leave but was prevented from doing so because of a medical condition that arose while such individual was present in the United States. To assert the medical condition exception, an individual generally must file Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition)
Medical Condition Exception Extended for COVID-19
Under Rev. Proc. 2020-20, the IRS expanded the statutory medical condition exception to cover delays in planned departures from the United States due to the COVID-19 Emergency. The updated exception allows an eligible individual, who planned to leave the United States but could not due to the COVID-19 Emergency, to exclude any 60 consecutive days they were here under the substantial presence test if the days fall on or between February 1, and May 30, 2020 (the “COVID-19 Emergency Period”). The exception is referred to as the “COVID-19 Medical Condition Travel Exception.”
Importantly, an eligible individual is conclusively presumed to have intended to leave the United States on any day during the individual’s COVID-19 Emergency Period unless the individual took steps to become a lawful permanent resident. The eligible individual is also presumed to be unable to leave the United States for purposes of the substantial presence test on any day during the individual’s COVID-19 Emergency Period.
An eligible individual is any individual (1) who was not a U.S. resident at the close of the 2019 tax year, (2) who is not a lawful permanent resident at any point in 2020, (3) who is present in the United States on each of the days of the individual’s COVID-19 Emergency Period, and (4) who does not become a U.S. resident in 2020 due to days of presence in the United States outside of the individual’s COVID-19 Emergency Period.
To claim the COVID-19 Medical Condition Travel Exception, eligible individuals who are otherwise required to file a Form 1040-NR must attach Form 8843 to their return and file it by the due date of the Form 1040-NR. The due date is listed in the Instructions for Form 1040-NR. The Form 8843 must be completed according to its instructions, and part V should be completed as follows:
- For line 17a, write “COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION.”
- For line 17b, write the start date of the Eligible Individual’s COVID-19 Emergency Period.
- For line 17c, write the end date of the Eligible Individual’s COVID-19 Emergency Period.
- Line 18 should be left blank. There is no need for a physician’s statement when claiming the COVID-19 Medical Condition Travel Exception.
Eligible individuals not required to file a 2020 Form 1040-NR are not required to file Form 8843 to claim the COVID-19 Medical Condition Travel Procedure, but should keep all of their relevant record to support their position and file a Form 8843 if requested by the IRS.