This is the second article of a three-part series discussing when a foreign national, such as a Bermudian or Bermuda resident, can be classified as a US tax resident under US tax regulations.
One of readers’ frequently asked questions is: “What is the definitive and specific answer to the amount of time a person (a foreigner with no US connections) can spend in the US after which the person must file a US tax return?”
The answer is — there is more than one answer! What we must ascertain for each visitor is whether he/she breaches the US substantial presence test (SPT). Note that there are numerous distinct criteria for review (and the below are only some of them):
1. The kind of visa/visa waiver the individual used to enter the US, and any subsequent changes.
2. Whether the individual has commenced proceedings to apply for US lawful permanent resident status (US green card holder).
3. The number of days.
4. The three-year rolling average computation.
5. The foreign individual’s actual tax residency.
6. The exception to the rule.
7. The kinds of US tax reports and filing obligations to which the foreign national — classified as a US tax resident — will be subject.
8. The consequences for non-adherence.
How does a Bermuda resident visiting the US determine whether he/she meets the substantial presence test, thereby being deemed a United States tax resident. Is there any recourse if the day-count is breached?
The key number is less than 183 days spent in the United States in a calendar year, or in the three-year rolling average calculation.
Let’s walk through a couple of examples using the three-year, including current tax year 2017, rolling average calculation.
I’ve put together a substantial presence spreadsheet calculator (see enclosed chart) for your use, just e-mail me for a copy.
Those who are happy with by-hand math, see last week’s article regarding the three-year rolling average calculation to determine if you are a deemed US resident as well as a link to the US IRS website. Your focus now should be on running more than one set of calculations, including prior year’s visits.
Our hypothetical example will assume the Bermuda visitor has a B-2 visa or a visa waiver. There are many other situations that can become incredibly complicated, ie, students, teachers, tax treaty modifications that may mitigate the tax obligations, whether the individual has commenced proceedings to apply for US lawful permanent resident status (US green card holder), etc. Space does not permit discussion. See US IRS source links below to review those more complex SPT calculations.
The foreign national never stays more than 120 days in the last three years: 2017, 2016, 2015. Thus, no US tax complications.
The foreign national meets the 120-day standard for two years of the three years, but stays longer in 2017, although not more than 182 days in a calendar year. Even so, the person is considered a deemed US tax resident, but who can meet the exception to the rule — if (and this is a big if) the person follows US IRS procedures carefully and consistently.
Keep in mind again, that the person will have adhered say to his/her visa allowing a six-month stay, but the immigration rule does not apply to US tax regulations.
There are four distinct review areas:
• 120 to 121 days is the magic number per calendar year because the total combined SPT number never rises above 182. The visitor who never stays more than 120 days in a calendar year does not have to think about, worry about US overstay, or having to compile the necessary paperwork to assert foreign tax residency.
• 121 to 182 days is the grey area based upon the three-year rolling day count. This calculation is confusing because as demonstrated in example two — it shows the individual overstaying, yet on an individual calendar year basis, the person has not breached the 182-day rule.
• The visitor who overstays every calendar year, but does not breach 182 days in any of these years.
• 183 days or more in a calendar year, the foreign national has breached, or passed, the substantial present test and is considered a US tax resident for that year. No recourse.
Where is your real tax residency? US tax laws, in so many areas, contain exceptions to every regulation. The substantial presence test is no exception. The foreign national can seek to avoid classification as a US tax resident, but this process requires careful consideration of the person’s residency and personal/familial connections.
Bermuda does not have an income tax regime; thus, the concept of asserting tax residency is unfamiliar and confusing even though Bermuda islanders are learning first hand the implementation of the 2014 OECD common reporting standards — country-to-country reporting requirements by all financial institutions.
Next: part three — the exception to the rule; the kinds of US tax reports and filing obligations to which the foreign national, classified as a US tax resident, will be subject; the consequences for non-adherence.
Caveat: the recent immigration policy initiatives of the Trump Administration are ever-evolving at date of this publication.
I am not your tax, financial or legal adviser. This information is general in nature and is not intended to be relied upon as your personal legal, financial, immigration, or tax advice.
Part 1, February 3, 2018, “When a US tax return becomes an obligation”,
US IRS alien residency examples
“The six-month rule”, Martha Myron, The Royal Gazette, https://goo.gl/QhUQvg
Martha Harris Myron CPA, 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: email@example.com