Does residency status lapse by returning to the taxpayer’s home country at the end or beginning of a tax year?

Question of the week: A client visited the U.S. for part of two years. She left in late 2019 and returned in early 2020. Does her residency status lapse?

August 05, 2020

Q. A client on an H-1B visa was in the U.S. for part of 2019 and part of 2020. Is she a part-year resident both years?

My client Dagmar is a citizen of Norway visiting the U.S. on an H-1B work visa. She first came to the U.S. on March 1, 2019 and returned to Norway November 1, 2019. At that point she wasn’t sure about her plans, but she ended up returning to the U.S. on February 15 and will definitely remain here through the end of 2020. What is Dagmar’s residency status for 2019 and 2020? She is concerned about the gap of over three months. Did her residency end when she left the country in 2019 and begin again in 2020? Is she a part-year resident both years?

A. If your client meets the substantial presence test both years, a “no-lapse rule” applies so that her residency is continuous.

A special rule called the “no-lapse” rule applies to Dagmar. Under the regulations (Reg. §301.7701(b)-4(e)):

  1. An alien individual who was a U.S. resident during any part of the preceding calendar year and who is a U.S. resident for any part of the current year is taxed as a resident as of the beginning of the current year.
  2. An alien individual who is a U.S. resident for any part of the current year and who is also a U.S. resident for any part of the following year is taxed as a resident through the end of the current year. This rule applies regardless of whether the individual has a closer connection to a foreign country during the current year.

Dagmar meets the substantial presence test in 2019 and in 2020. She was in the U.S. at least 183 days in 2019 and, unless her plans change again, will be in the U.S. at least 183 days in 2020. (Should her plans change before reaching the 183-day point, Dagmar would need to be in the U.S. at least 31 days and count all days of presence in 2020 and one-third of the days of presence in 2019 to see if the 183 day test is met in 2020. If Dagmar had been in the U.S. in 2018, she would also count one-sixth of those days too.)

2019 residency status. Since Dagmar is a resident under the substantial presence test and this is her first year of residency, her residency start date is her first day of presence in the U.S. which is March 1, 2019. Applying the second part of the no-lapse rule to 2019, Dagmar meets the requirement of being a resident for some part of both 2019 (the current year) and 2020 (the following year) so she remains a U.S. resident through the end 2019.

Dagmar is a part-year resident for 2019. If she is married, she and her spouse could choose to be treated as resident aliens for all of 2019. If so, they would be taxed on their worldwide income for the entire year. See “nonresident spouse treated as a resident” in IRS Pub. 519, U.S. Tax Guide for Aliens.

2020 residency status. The first part of the no-lapse rule applies to 2020. Dagmar was a resident some part of 2019 (the preceding year) and 2020 (the current year), so she is a resident as of January 1, 2020. Unless her plans change, she’ll be a full-year resident for 2020. If she does return to Norway before the year ends, her status as part-year or full-year resident, that is, whether the no-lapse rule will apply to the end of 2020, will depend on whether she comes back to the U.S. in 2021 and remains here long enough to be a resident.

Although Dagmar became a resident alien under the substantial presence test, the no-lapse rule would apply as well under the green card test.

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