The COVID-19 pandemic and resulting border closures and travel restrictions have upended the tax and immigration plans of various foreign persons who have been unable to leave the U.S. and return to their home countries. However, the IRS issued guidance offering some potential relief to both individual travelers whose prolonged stays in the U.S. have forced them to become accidental income tax residents as well as their foreign employers.
Under U.S. tax laws, foreign citizens who are physically present in the country for a minimum of 183 days during a calendar year, or at least 31 days during one year and 183 days or more over the previous three year, are considered to be U.S. income tax residents, or resident aliens (RAs), who must report and pay U.S. taxes on their worldwide income. By comparison, a nonresident alien (NRA) is required to pay U.S. tax only on income they earn from U.S. sources.
There are, however, limited exceptions to the physical presence test of U.S. income tax treatment for RAs. More specifically, the medical condition exception allows foreign persons to exclude from the physical presence test those days that they are unable to leave the country due to a medical condition that arose during their presence here. With the impact of the COVID-19 health crisis, the IRS has expanded this medical condition exception, allowing foreign citizens to exclude from their physical presence calculation up to 60 consecutive days they are in the U.S. due to the COVID-19 health crisis, provided that period began between February 1 and April 1, 2020.
Additional IRS relief is available to foreign corporations and partnerships that may find themselves unintentionally subject to U.S. tax obligations because the COVID-19 travel restrictions left their executives stranded in the U.S. for a period that would otherwise create a U.S. trade or business (USTB) or permanent establishment (PE). Generally, a nonresident alien or foreign corporation engaged in a USTB is taxed on its business income connected to that USTB. If a U.S. income tax treaty exists, the foreign corporation will not be liable for tax on the USTB’s profits unless it conducts its activities through a U.S. permanent establishment, such as a fixed office or dependent agent. With the benefit of IRS relief, foreign businesses may disregard 60 consecutive days of its U.S. activity between Feb. 1 and May 31 for tax purposes.
To qualify for relief, taxpayers work closely with their financial advisors, being careful to maintain meticulous records and demonstrate that any extended stay in the U.S. and any activities conducted on U.S. soil were unavoidable due to the COVID-19 pandemic and the resulting cross border travel disruptions.
About the Author: Oscar Castellanos, WMS, AAMS®, is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Miami office at (305) 379-8888 or via email at firstname.lastname@example.org.
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Oscar Castellanos, WMS, AAMS®, is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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