In order for an individual to determine his or her U.S. tax filing obligations, this basic question must be asked from the outset – who is a U.S. person in the eyes of the IRS?
In this blog, we give the definition of a U.S. person as set out in the U.S. tax code and U.S. Treasury regulations and provide examples to help flesh out the definition. While the definition of a U.S. person has relevance for both individuals and entities (corporation, partnership, etc.), the focus of this blog is the definition for individuals.
We also include a breakdown of COVID-related legislation that became relevant for this issue over the past year.
Defining a US Person
As a basic rule, U.S. citizens, even those residing outside the United States, are considered to be U.S. persons for tax purposes and are therefore subject to U.S. tax reporting on their worldwide income.
Green card holders also have the status of U.S. tax persons, even if living abroad. Therefore, they are also required to file a return annually (regardless of their country of residence) and report their worldwide income.
A U.S. tax treaty, if applicable, may give a green card holder the option to elect non-resident alien (“NRA”) status and thereby be released from U.S.-tax-resident status. This type of position is often very tricky and requires a detailed technical analysis by a competent tax professional.
Substantial Presence Also Triggers US person Status
Perhaps it is less well known that an individual may also be considered a U.S. person if the substantial presence test is met for the calendar year.
Under this test, an individual other than a U.S. citizen or green card holder can be considered a U.S. person if he or she is physically present in the United States on at least: (a) 31 days during the current calendar year; and (b) a total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year.
Example – John, a Canadian citizen, was physically present in the United States for 150 days in each of the years 2018, 2019, and 2020. John would fail the substantial presence test, because the 150 days of presence in 2020, 50 days in 2019 (1/3 of 150), and 25 days in 2018 (1/6 of 150), together total 225 days, which is greater than the 183-day threshold.
Exceptions to the Substantial Presence Test
You are treated as present in the United States for purposes of the substantial presence test on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Examples of days of presence that are not counted for the substantial presence test include:
- days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States; and
- days you are an exempt individual (which includes certain teachers, students, and professional athletes)
Example – John, a Canadian citizen, was physically present in the United States for 150 days in each of the years 2018, 2019, and 2020. For the last year (2020), John held a business visa, while for the first and second years (2018 and 2019), he held a teacher’s visa. At the outset, John would fail the substantial presence test, because the 150 days of presence in 2020, 50 days in 2019 (1/3 of 150), and 25 days in 2018 (1/6 of 150), together total 225 days, which is greater than the 183-day threshold. However, since John held a teacher’s visa in 2018 and 2019, his days of presence in the United States during those years are not counted. As such, John should not be considered a U.S. tax resident under the substantial presence test for 2020.
Additional exceptions to the substantial presence test include:
The closer connection test – Under U.S. tax law, even if you fail the substantial presence test, you can still be treated as a NRA if you maintain a “tax home” in a foreign country during the year and have a “closer connection” during the year to one foreign country in which you have a tax home than to the United States.
Treaty relief – Under an applicable U.S. tax treaty, an individual may be subject to a less onerous test than the substantial presence test.
It is important to note that there are specific filing requirements associated with each of the above exceptions (e.g., Form 8840 for the closer connection test and Form 8833 for treaty relief). An expat tax professional should be consulted to ensure that the proper filings are executed, otherwise these important exceptions may otherwise be unavailable.
COVID Exception to US Person Status
In response to the COVID pandemic, the IRS published Revenue Procedure 2020-20, which states that for purposes of the substantial presence test, up to 60 consecutive calendar days of U.S. presence that are presumed to arise from travel disruptions caused by COVID will not be counted for purposes of determining U.S. tax residency.
An individual will be presumed unable to leave the U.S. for purposes of the substantial presence test on any day during the so-called “COVID-19 Emergency Period,” which is a period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the U.S.
Individuals who have a requirement to file a Form 1040-NR for 2020 (taking into account the COVID exception) must attach a Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to claim the exception. Individuals who are not required to file a 2020 Form 1040-NR are not required to file the form, but should retain all relevant records to support reliance on the revenue procedure and be prepared to produce these records and complete a Form 8843 if requested by the IRS.