Winter’s coming, time to move south. Will I become a US person subject to US taxation on my worldwide income?
According to the domestic tax laws of the United States, the substantial presence test (“SPT”) is used to determine the residency status of a person in the United States. This is a calculation of a number of days to be done each fiscal year as follows – as you’ll see it also uses days from prior years:
+ Every day in the year
+ 1/3 of the days in the year preceding the first
+ 1/6 of the days in the second preceding year
If the total is over 183 days and the individual has spent more than 30 days in the United States in the current fiscal year, that person would have met the SPT and is considered a resident / “US person” for income tax. One may avoid becoming a resident by spending on average less than 122 days in the United States during a fiscal year.
When someone meets the SPT, it is possible, however to claim the “closer connection exception”, if all the following conditions are met:
- The individual is physically present in the United States for less than 183 days in the current fiscal year;
- The individual can establish that during the current fiscal year, which had a tax home in a foreign country; and
- The individual can establish that he had a closer connection to a foreign country that was his tax home than the United States
In order for the IRS to consider you to have a closer connection to a foreign country, you must have more important contacts with that foreign country than with the United States. Factors considered include the location of the following:
- main permanent residence during the year;
- personal effects*;
- financial statements;
(sometimes called the “Teddy Bear” rule – I just like the name, basically that’s where your items of sentimental value – dear and near – are stored).
To qualify for the closer connection exception, the person must file IRS Form 8840 Closer Connection Exception Statement for foreigners with a timely filed return – the deadline for the tax return 1040NR is 15 June of the following year (April 15 if the individual has received wages subject to US withholding). It is however possible to apply for an automatic extension on form 4868 (by applying before the original due date), which would bring the extended deadline to October 15.
If a person is present in the United States for more than 183 days in a given fiscal year, he/she will be considered a resident of the United States for purposes of the income tax that year, the closer connection exception is not possible.
However, when that person is from a country with an income tax treaty with the US (such as Canada), they can still be treated as a non-resident (and only pay income tax on US sourced income). But by taking a treaty position on form 8833 as opposed to using the closer connection exception, that person would still have to file informational returns (FBAR, form 3520, 5471, 5472, 8621…).
Enjoy the winter and see you next spring when the sun is going to start peeking up North again.