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April 15, 2011 - Phil Hodgen

Tax classification of expatriates returning to United States for visits

I received a question yesterday from a client who gave up his green card last year.  We are doing the tax work for his expatriation.  He is planning to return to the United States this summer for a tourist type of visit.  See friends and family, etc. etc.

He wanted to know if there are any tax pitfalls connected to this.  He remembered something about a 30 days rule.  Good memory!  🙂

I thought I would answer the question here because it is something that comes up again and again.

Question this discussion answers

This discussion answers the question:

If I give up my U.S. permanent resident visa and later return to the United States for a visit, will the Internal Revenue Service consider me to be a resident of the United States for income tax purposes?

The reason this is so important is that someone who leaves the United States ceases to be a U.S. resident for tax purposes.  That person no longer needs to pay income tax in the United States, and more to the point that person is no longer subjected to the U.S. drift net of tax reporting forms such as the FBAR (Form TD F 90-22.1) (PDF) and its ilk.

TL;DR

Everyone–expatriates and covered expatriates, regardless of expiration date–is subjected to the normal tests for “are you a U.S. resident for tax purposes?”  These are:

  • Spend more than 183 days in the United States and you are automatically a U.S. resident for income tax purposes; or
  • Spend enough days in the United States over a three year period, and you are automatically a U.S. resident for income tax purposes.

If your expatriation date is June 17, 2008 or earlier and are a mere expatriate (you gave up your green card or U.S. citizenship, did all of your tax paperwork on time and filed it with the IRS, but you are “poor” for certain definitions of “poor”), you don’t have to worry.  The restrictive rules apply only to “covered expatriates” who expatriated before June 18, 2008.  Since you are a mere “expatriate” you are free to enter the United States as a tourist, without suffering ill effects under the U.S. tax regime.

If your expatriation date is June 17, 2008 or earlier and you are a covered expatriate, you are under the old, restrictive rules.  If you are in the United States for more than 30 days in a calendar year, you will be treated as a U.S. resident for all tax purposes.  You must file Form 1040 (the resident’s income tax return).  You must satisfy all relevant reporting requirements (Form TD F 90-22.1, etc.).  If you make a gift in that calendar year you may have to pay gift tax.  If you die during that year, all of your worldwide assets are subjected to U.S. estate tax.

If your expatriation date is June 18, 2008 or later, you are exempt from the “more than 30 days makes you a U.S. resident for tax purposes” rule.  This applies to expatriates as well as covered expatriates.

Some definitions

Here’s some insider jargon for you.  This knowledge, plus the magic date, is what you need to know in order to figure out what happens if you give up your green card (or U.S. passport) and later return to the United States.

  • Expatriate. Someone who gives up U.S. citizenship of ceases to be a green card holder is an “expatriate”–that’s the language used in the Internal Revenue Code.
  • Covered Expatriate.  There is a sub-set of expatriates who–in the eyes of the U.S. government–are too rich.  (This is measured by having a net worth of at least $2,000,000, or by paying a lot of Federal income tax each year.)  I’m going to call these people “covered expatriates” because that’s the language that is used in the Internal Revenue Code.
  • Expatriation Date.  The day that you revoke your citizenship or relinquish your green card is called the “expatriation date.”

Before June 18, 2008–the old “31 days and you’re a dead dog” rules

For people who have an expatriation date before June 18, 2008 (i.e., they have an expatriation date of June 17, 2008 or earlier), Internal Revenue Code Section 877 describes their fate under U.S. tax law.  I’m not going to talk about how they are taxed–it is unimportant for our purposes here.

Section 877(g)(1) has the special rule–the rule remembered by my client–which said “If you’re in the U.S. in a subsequent year for more than 30 days, you’re a U.S. person for tax purposes.”  Section 877(g)(1) says:

This section [i.e., Section 877] shall not apply to any individual to whom this section would otherwise apply for any taxable year during the 10-year period referred to in subsection (a) in which such individual is physically present in the United States at any time on more than 30 days in the calendar year ending in such taxable year, and such individual shall be treated for purposes of this title as a citizen or resident of the United States, as the case may be, for such taxable year.

In other words, for 10 years after you expatriate, if you come back to the U.S. for more than 30 days in a calendar year, you are no longer treated as an expatriate for that year.  You are treated as a regular U.S. citizen or permanent resident.  There are a host of exceptions to the rule. See Section 877(g)(2) for these. They are unimportant to the discussion we’re having now, but in tax law you always have to look for the exceptions to the rule. 🙂

One more thing.  Section 877(g)(1) says that “if you expatriated under the old rules and are in the U.S. for more than 30 days you are dragged back into the U.S. tax world” but it specifies that this rule only applies to “an individual to whom this section would otherwise apply.”  That means people who face taxation under Section 877 because they meet the definitions of Section 877(a).  These are covered expatriates.  So regular, ordinary people who expatriate don’t have to worry about the “more than 30 days and you’re a U.S. taxpayer again” rule.

Summarizing, then, here is how it works:

  • Only covered expatriates are subjected to Section 877 tax rules.
  • So only covered expatriates get hammered by the rule of Section 877(g)(1) which makes them U.S. taxpayers again if they stay in the U.S. for 31 days or more.
  • Regular, ordinary expatriates don’t have to worry about the Section 877(g)(1) rules, and can stay 31 days or more with (relative) impunity.

After June 17, 2008, the old “31 days or more” rule doesn’t apply

Section 877 does not apply to people who have an expatriation date of June 18, 2008 or later.  See Section 877(h), which says:

This section [i.e., Section 877] shall not apply to any individual whose expatriation date (as defined in [26 USCS §877A(g)(3)]) is on or after the date of the enactment of this subsection.

“This subsection” means Section 877(h), which was placed into law on June 17, 2008.  [P.L. 110-245, Title III, §301(c)(2)(A), (d), 122 Stat. 1646.]

In other words, expatriates and covered expatriates alike who have an expatriation date of June 18, 2008 or later will not have to worry about the Section 877(g)(1) “be in the USA more than 30 days and you’re a U.S. taxpayer again” rule, because that rule doesn’t apply to them at all.

The standard rules for being a U.S. tax resident

I just described the special rules that apply to U.S. citizens and permanent residents who change status and become noncitizens or nonresidents.  But there is a standard set of rules that are used in all circumstances to determine whether you are a resident of the United States for income tax purposes.  So people who give up green cards or citizenship still have to figure out one more thing in order to determine whether they are U.S. taxpayers or not when they return to the USA for a visit.

The standard tests ask you to count the number of days that you were in the United States for a calendar year.  If you go over a defined threshold, you are a U.S. resident and subjected to the U.S. tax system.  The rules are complicated and this is not an exhaustive discussion of these rules.  But here is how they generally work.

First, if you spend 183 days or more in the United States during a calendar year, you are a resident for income tax purposes for that calendar year.  End of story.

Second, there is a three-year rolling average test.  Calculate the number of days that you were in the United States for the year that you are trying to figure out residency status for.  Write down that number.  Do the same thing for the prior year.  Take that number and divide it by three.  Don’t round off the fraction.  Write down that number, too.  Finally, take the number of days you were in the United States for the year before THAT.  Divide by six.  Don’t round off the fraction.  Write down that number.  Take the three numbers you wrote down and add them together.  Does the total come to 183 or more?  If so, you are a tax resident of the United States for the current year.

Here’s an example.

Let’s say you need to figure out whether you were a U.S. resident or a nonresident in 2010.  You don’t have a green card.  You don’t have U.S. citizenship.

In 2010, you were in the United States for 90 days.  You were also in the United States for 90 days in 2009 and you were in the United States for 120 days in 2008.

  • Take the 2010 number of days = 90.
  • Take the 2009 number of days and divide by three.  90/3 = 30.
  • Take the 2008 number of days and divide by six.  120/3 = 20.
  • Add the three numbers together.  90 + 30 + 20 = 140.
  • 140 is less than 183.

Conclusion:  you are not a resident of the United States for income tax purposes.

Expatriation