United States

Displaced individuals of U.S. territories get residency relief

Grace period for absences extended from 14 days to 117 days

TAX ALERT  | 

In Notice 2017-56, the IRS extended the allowable absence period for individuals displaced by either Hurricane Irma or Hurricane Maria when testing to see whether the individual can be treated as a bona fide resident of a U.S. territory. This can be relevant to taxpayers who are excluding, for U.S. income tax purposes, income earned in a U.S. possession by a bona fide resident of that possession. In particular, this provision could be of great relevance to U.S. taxpayers who has established residence in Puerto Rico for purposes of taking advantage of the significant local tax incentives established in 2012 and which are available to businesses and individuals who locate there.

Section 937(a) provides that a person will be considered a resident of a U.S. territory if the taxpayer meets the “presence test” and does not have a tax home or a closer connection to a jurisdiction outside the U.S. territory. Reg. section 1.937-1(c)(3) states that, for purposes of the presence test, individuals will be considered present in a U.S. possession during the 14-day period, within which a major disaster occurs, if they were either forced to leave or were unable to return due to the disaster during that period.

The IRS expanded this 14-day window with the release of Notice 2017-56. Effective Sept. 6, 2017, and ending Dec. 31, 2017, the IRS notice extends the window to 117 days. As a result, any individual outside one of the affected U.S. territories between Sept. 6, 2017, and Dec. 31, 2017, will still be considered present for purposes of the test, provided they were forced to leave or were unable to return as a result of the disaster.

The purpose of the relief is to allow impacted individuals, who might otherwise lose their status as “bona fide residents” of the US. territory, to retain their status. This will help limit the likelihood that those impacted by one of the hurricanes might suddenly lose the income exemption that normally applies for U.S. income tax purposes for income earned within the possession.

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