“Quarantining" in the States: Tax Residence Issues During the COVID-19 Pandemic

By:
Scott S. Ahroni, JD, LLM (taxation)
Published Date:
Sep 1, 2020

The global outbreak of COVID-19 has significantly impacted individuals and their ability to travel. Many are under state quarantine orders, “sheltering in place,” or simply afraid or uncomfortable to leave their home. Other individuals have left their home in one state for the prospect of a safer, more socially distant location in another state or country. 

What many individuals may not have realized is the significance their physical presence has in determining whether they’re an income tax resident under federal, New York State (NYS), and New York City (NYC) tax laws.

Whether an individual is a tax resident is a critical determination, because U.S. and New York tax residents are taxed on their worldwide income. On the other hand, nonresidents are subject to tax only on income sourced to the taxing jurisdiction in question. For example, New York nonresidents are generally not subject to tax on income from intangibles, retirement income, and wages for services rendered in other states. Similarly, federal law also generally shields nonresidents from tax on similar types of income, as well as capital gains other than gains derived from United States real property interests.

This difference in taxation for residents and nonresidents creates a strong incentive for taxpayers to structure their affairs to avoid unnecessarily becoming a tax resident.

A key factor in many of the tax resident rules is an individual’s physical presence in the taxing jurisdiction during the testing period (e.g., calendar year). This article will discuss how COVID-19 will significantly impact these day-count tests, given that taxpayers will be required to involuntarily stay in the United States/New York for unexpected and possibly lengthy periods of time this year. 

In addition, while there are many similarities between the day-count tests at the federal and NYS/NYC level, tax practitioners need to be aware of—and plan for—the differences in the relevant residency laws. This discussion will also highlight the main differences between the physical presence tests under both federal and NYS/NYC laws.

In determining one’s day count, both federal and NYS/NYC laws exempt days spent in the United States and NYS/NYC, respectively, if due to a medical condition (known as the medical condition exception). However, it’s important to note that this is an exception, not the rule, and it wasn’t created with a global health pandemic in mind. So, this article will review and compare the federal and NYS/NYC medical condition exceptions in light of COVID-19, the disease caused by the new coronavirus, and will discuss recently released federal relief that greatly expands the use of the medical condition exception.

Statutory Resident Rules

The IRC defines a tax resident to include an individual that has a substantial physical presence in the United States (substantial presence test). In order to satisfy the substantial presence test in a given year, a foreign national must be in the United States for—

  • 31 days or more in that given year and
  • a combined 183 days or more in the given year and the two immediately preceding calendar years.

When calculating the day count for the two preceding years, a day in the first year is counted as one-third of a day; a day in the second year counted as one-sixth of a day. As such, tax practitioners should be sure to not only ask their clients how many days they were in the United States in a given year, but must also consider the days spent in the United States in the previous two years.

NYS/NYC laws define a resident as an individual who, among other things, is physically present in NYS or NYC for more than 183 days in a calendar year (statutory residency test). Unlike the substantial presence test, the statutory residency test looks only at the number of days an individual is physically present in New York during the calendar year in question. Moreover, it is important to highlight that the threshold number of days in the United States to become a resident under federal law is 183, while New York law gives taxpayers an additional day, (i.e., the taxpayer needs to be in New York for at least 184 days in the calendar year). 

Taxpayers can satisfy the federal substantial presence test, even if they do not have a residence in the United States at any point during the tax year. Under New York’s statutory residency test, however, the taxpayer must not only have a residence, but must maintain such residence for substantially all of the year. The regulations define a “year” as a period that exceeds 11 months. 

Example

The following example demonstrates the differences in applying the federal and NYS/NYC statutory residency tests:

Bob Johnson is visiting the United States from London and is required to stay in New York due to COVID-19 travel restrictions. Because of this, he spends 150 days in the United States in 2020. Is Johnson a U.S. statutory resident or New York resident?

Under New York law, Johnson will not be considered a New York statutory resident in 2020 because he was not in New York for more than 183 days.

On the other hand, more information is needed to determine whether he’s a federal statutory resident, since federal law also considers days spent in the United States during the previous two years. In that regard, assume that Johnson also spent 90 days in the country in 2019 and 60 days in 2018.

Under the federal statutory residency test, Johnson is considered having spent effectively 190 days (150 + [90 x 1/3] + [60 x 1/6]) in the United States over the past three years. Therefore, Johnson would be treated as a U.S. income tax resident for 2020.

Exceptions to Statutory Resident Tests

New York doesn’t have any exceptions available to taxpayers who satisfy the statutory residency test.

Unlike New York law, federal law provides an exception, referred to as the closer connection test. U.S.  tax treaties may also provide relief to dual-resident taxpayers, including those that satisfy the substantial presence test.

Closer connection test

To satisfy the closer connection test, the taxpayer must—

  • ·not be present in the United States for more than 183 days in the current calendar year,
  • maintain a “tax home” in a single foreign country, and
  • have a closer connection to the foreign country where the tax home is maintained.

A tax home is where an individual maintains their regular place of business, or, if more than one, their principal place of business; if the individual doesn’t maintain a regular place of business, a tax home is their regular place of abode. The individual must maintain the tax home for the entire year, and the tax home must be in the same country to which they’re claiming a closer connection.

A closer connection means having more significant contacts with the foreign country, with the following among the criteria relevant to that determination:

  • The location of the individual’s permanent home
  • The location of the individual’s family
  • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by the individual and their family
  • The location of social, political, cultural, or religious organizations with which the individual has a current relationship
  • The location where the individual conducts routine personal banking activities
  • The location where the individual conducts business activities (other than those that constitute the individual’s tax home)
  • The location of the jurisdiction in which the individual holds a driver’s license
  • The location of the jurisdiction in which the individual votes
  • The country of residence designated by the individual on forms and documents
  • The types of official forms and documents filed by the individual, such as Form W-8 or Form W-9.

After taking into consideration the above factors, if a taxpayer has a closer connection to a country other than the United States, the taxpayer will be treated as a U.S. nonresident for the year, even if they satisfied the substantial presence test.

U.S. income tax treaty relief

Taxpayers who satisfy the substantial presence test may also be residents of a foreign country with which the United States has an income tax treaty. If such dual resident is considered a resident of the foreign country under the tiebreaker rule in the treaty, they can compute their tax liability as if they were a United States nonresident for the tax year.

Treaty tiebreaker rules generally look at the following factors:

  • The existence and location of a permanent home
  • The center of vital interests
  • The individual's habitual abode
  • Nationality

The tiebreaker rules test these factors in the order above. Once a factor has been satisfied with respect to the United States or the foreign country, residency is attributed accordingly. If the factor is met for both countries, the next factor is tested. If none of the factors are determinative, the competent authorities of the United States and the foreign country endeavor to settle the question by mutual agreement.

Medical condition exception

In general, an individual is treated as present in the United States and New York on any day they’re  physically  present in the taxing jurisdiction at any time during the day. In theory, even one second counts as a day. However, there are exceptions, where certain days of physical presence may not count for purposes of the test.

 In that regard, both federal and New York law include a medical condition exception. It provides that a taxpayer is not treated as being physically present in a taxing jurisdiction if they have a medical condition that otherwise prevents them from leaving. The rationale is that the taxpayer is involuntarily present in the taxing jurisdiction and, therefore, the day should not count.

Under federal law, an individual isn’t considered in the United States on any day they intended to leave but were unable to, due to a medical condition that first arose in the United States. Based on this rule, an individual who contracted COVID-19 while in the United States would be able to exclude any days they remained in the country due to COVID-19.

However, this wouldn’t offer any protection to a taxpayer who was afraid to leave the United States due to COVID-19. This would also likely not protect an individual who contracted COVID-19 and recovered but chose not to leave due to a quarantine order.

In addition, the medical exception applies only to medical conditions that first arose in the United States. It’s unclear how the exemption would apply to a taxpayer with a preexisting medical condition that was exacerbated following contraction of COVID-19. If the taxpayer couldn’t leave after recovering from COVID-19 due to the worsening of a preexisting condition, the IRS could take the position that the days the taxpayer remained in the United States should be included in the day count test.

In light of these issues, IRS released Revenue Procedure 2020-20, which provides relief to nonresidents who are in the United States for any reason related to COVID-19. Pursuant to Rev. Proc. 2020-20, a nonresident may exclude up to 60 calendar days of presence in the United States for 2020. The nonresident can elect when the 60-day exclusion period begins but must choose a start date during the period Feb. 1, 2020, through April 1, 2020. Nonresidents seeking to use this relief should timely File Form 1040-NR with Form 8843, claiming the COVID-19 medical condition travel exception.

Under NYS/NYC law, the medical condition exception applies only to days spent in a medical facility on an inpatient basis. That means that anyone “sheltering in place” or abiding by a quarantine order in their home would likely not qualify to use New York’s medical condition exception. It is settled case law that outpatient care is not covered by the medical condition exception.

Based on this interpretation, it appears that there would be no difference if someone was “sheltering in place” or quarantining, voluntarily or involuntarily, in their home or otherwise. If the individual isn’t in a healthcare facility, their physical presence in New York for that day is counted for purposes of the statutory residency test. As if that wasn’t harsh enough, it is also settled case law that caring for one’s spouse or relative in a hospital is not covered by New York’s medical condition exception.

 At the time of this writing, New York has introduced legislation that could possibly help taxpayers who are sheltering in place from satisfying the statutory residency test, but at this time, the legislation is still pending. As such, individuals in New York should be sure to check their day count immediately to try to avoid a statutory resident determination.

COVID-19’s Impact on Domiciliary Determinations

NYS/NYC define tax residents as individuals who are domiciled in NYS/NYC or individuals who meet the statutory resident test. 

New York defines “domicile” as where a person has their true, fixed, permanent home. It is the principal establishment to which they intend to return whenever absent. Once an individual’s domicile is established, that location will remain their domicile until the person can show with “clear and convincing evidence” that they intended to both give up their old domicile and establish a new domicile.

One misconception many people have is that they simply need to leave New York and live somewhere else for them to change their domicile. This is simply incorrect and will leave many taxpayers on the losing side of an eventual residency audit by the NYS Department of Taxation and Finance. Merely leaving a state, even if for six to eight months, is generally not enough to change one’s domicile. If the taxpayer intends to return to the state after the COVID-19 pandemic is over, they are likely still a domiciliary of that state.

While domicile is an intent test, physical presence in NYS/NYC is a factor when attempting to show a change in domicile. This could be relevant for taxpayers who recently changed their domicile to another state but were forced to come “home” to New York to care for a loved one.

So, taxpayers who recently changed their domicile should keep records of other primary domicile factors. These include the following:

  • Location and use of home
  • Location of business and location of performance of services for business as owner or employee
  • Time spent in New York compared with other locations, including the intended place of the new domicile
  • Location of items “near and dear” to a taxpayer (like heirlooms, collectibles, and items that have intrinsic value to the taxpayer)
  • Location of family members, with a focus on a taxpayer’s spouse and minor children

The COVID-19 pandemic can also be a good opportunity to change one’s domicile, because auditors typically look to tie a change in domicile to a significant life-changing event, which this certainly is.

If a taxpayer hasn’t changed their domicile, they may still qualify for a domicile exemption. New York law provides for two different domicile exemptions, commonly referred to as the 30-day test and the 548-day test.

Under the 30-day test, a New York domiciliary is treated as a nonresident if they—

  • don’t maintain a residence in New York,
  • do maintain a residence outside New York, and
  • are not present in New York for more than 30 days in a calendar year.

The 548-day test also allows a New York domiciliary to be treated as nonresident. To satisfy the 548-day test, the taxpayer must, among other things, be in one or more foreign countries for 450 out of 548 days. Once again, day counts play an important role in determining whether a taxpayer is a NY resident.


Scott Ahroni, JD, LLM (taxation) is a partner in Robinson Brog’s tax department. His practice focuses on federal and New York State and New York City tax controversies, representing clients in federal and state criminal investigations and revenue crimes bureau and special investigation unit examinations where he assists clients in, among other things, responding to subpoenas and investigative demands. Mr. Ahroni is a noted thought leader in the field. He is frequently called upon to speak on tax topics related to current issues in his field.  Mr. Ahroni currently serves as an adjunct professor at Queens College, City University of New York, where he teaches graduate courses in State and Local, Business and Estate and Gift Taxation.  Mr. Ahroni received his juris doctorate degree cum laude and his LLM in taxation from the University of Miami School of Law. 

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.