When a US tax return becomes an obligation
The following question has been a familiar recurring topic over the 18 years of Moneywise.
A reader wrote: “Many Bermudians have — or are considering buying — homes in the United States even though they are not US citizens nor individuals who are normally required to file a US tax return.
“The question is: what is the definitive and specific answer to the amount of time a person can spend in the US after which the person must file a US tax return.
“The answers seem to vary with each person you talk to and their understanding of US Internal Revenue Service tax code. Some think it is the number of days in each year, others say it is a rolling average.
“Also, the ability to stay in the US (if you are not a citizen) is at the prerogative of US Customs where permission may be granted for longer stays, however, those answers never seem clear cut either.”
This reader is correct. There is never a simple answer to these questions, folks.
The determination to understand what legal rights an individual has relative to residence in a country, how an individual can be considered subject to taxation, along with immigration/citizenship regulations creates substantive confusion.
Who you are, where you are, and what these rights and responsibilities mean must be clearly understood whenever an individual or family is crossing borders on a routine basis.
Readers who don’t want to bother wading through the following discourse should consult internationally qualified professionals and/or the US consulate in Bermuda for clarity in order to avoid running into jurisdictional financial, legal, and immigration mishaps.
Things to consider include:
• How is the person entering the US?
• What is a US tax resident compared to a lawful permanent resident or US citizen?
• What constitutes United State tax residency; and what are the responsibilities of such an individual residing in the US?
• What are the consequences if you overstay?
• Define the grey areas and other circumstances that present more complications.
• Overstaying due to a theoretical math calculation, but not in reality.
• No physical connections, no investment connections
• Foreign person owns US situs assets or has US business interests, ie leasing an investment property that is owned by a corporation.
US immigration law relative to entrance into the United States. US citizens, no matter where they live outside the US, can return to US soil anytime for as long as wanted without needing a visa. Generally, in most circumstances, this right applies to US green card holders (lawful permanent residents), although time constraints and exceptions can cause a right to residency to be lost or revoked. A topic for another day.
Foreign nationals (non-US persons) entering the United States are generally issued a US visa — there are numerous categories — or are eligible for a visa waiver or exception. These documents define the permissible amount of time the individual is legally allowed in the US, ie 90 days, 180 days or possibly longer. For more details see the US Department of State link at https://goo.gl/cXxZob
That is the US Homeland Security position on visiting the United States. US Internal Revenue Service’s tax position is very different, nor do the two agencies usually correlate their respective positions.
US residency for tax purposes.
In international taxation, a physical presence test is a rule used to determine tax residence of a natural person, an individual, or legal person (meaning a place of business in a jurisdiction).
The physical presence for individuals is the main test, where meeting (or not) the 183-day rule (the so-called substantial presence test in the United States).
Determining a fail or pass in the US substantial presence test.
According to US IRS direct, a foreign individual will be considered a US resident for tax purposes if they meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the US on at least:
• 31 days during the current year, and
• 183 days during the three-year period that includes the current year and the two years immediately before that, counting:
• All the days you were present in the current year, and
• One-third of the days you were present in the first year before the current year, and
• One-sixth of the days you were present in the second year before the current year.
As an example, you were physically present in the US on 120 days in each of the years 2014, 2015, and 2016. To determine if you meet the substantial presence test for 2016, count the full 120 days of presence in 2016, 40 days in 2015 (1/3rd of 120), and 20 days in 2014 (1/6th of 120). Since the total for the three-year period is 180 days, you are not considered a resident under the substantial presence test for 2016.
If you pass this test (183 days), you are now considered a US resident for US tax purposes with US income tax reporting and filing responsibilities for that year; I recommend you anticipate your status each year by running additional various day count scenarios.
And, of course, there are exceptions to this test. You just knew that! Watch for that magic number of 120 days.
Stay tuned for part two next week, which will give more details.
Caveat. The recent immigration policy initiatives of the Trump Administration are ever-evolving at date of this publication. This information is not intended to be relied upon as your personal legal, financial, immigration, or tax advice.
Bermuda residents (or any foreign person) thinking of visits or temporary residence in the US should seriously consider significant financial planning prior to any such intention in order to effect as smooth a transition to another country as possible. Be forewarned. Tax regime regulation, which Bermuda does not have, are always complicated, complex financial traps for the uninformed. Trust me, I know this fact.
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org