This week’s question came from reader O. He asks about expatriates returning to the United States and a way in which an expatriate might become a U.S. taxpayer again–by spending too much time in the United States.
I liked your blog post on the Substatial Presence Test : Max 183 days/year or 121 days/year for consecutive years ;-). http://hodgen.com/the-substantial-presence-test-explained/
My question is, is there a different rule for expatriates? It seems that under section 877, those who expatriated between 2004 and 2008 have a 30 day limit per year in the 10 years after expatriation. I don’t see this after 2008, so I assume this restriction no longer applies. Is this also your interpretation?
Best regards and thanks for all the good information.
The same rules that apply to every other nonresident apply to expatriates: if you spend too many days in the United States in a
calendar year, you will be a resident of the United States and taxable on your worldwide income.
Quick numbers to remember if you want to avoid being a U.S. taxpayer after giving up your passport or green card:
For people who expatriated before June 17, 2008, a special rule ensured that they would stay out of the United States. Anyone (with a couple of exceptions) who spent more than 30 days in the USA would be taxed as a citizen or resident (on worldwide income) rather than an expatriate:
This section 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.1
That rule does not apply anymore, effective for expatriations on or after June 17, 2008.2
Your U.S. citizenship causes you to be subject to U.S. income tax on all of your income. So does a green card–its holder is taxable on all income earned.
An expatriate by definition is someone who is neither a U.S. citizen nor a green card holder. The IRS holds no power over
expatriates because of nationality or visa status, because these two things have been terminated. The only way that an expatriate can become taxable in the United State on worldwide income is by becoming a “resident” of the United States. If the expatriate avoids that status, then the only income that is taxable by the United States is income that comes from U.S. sources.
There are two ways an expatriate can become a U.S. resident for tax purposes:
I am going to ignore the first point. If you voluntarily choose to be a U.S. taxpayer again (taxable on your worldwide income), well, it’s your own fault. 🙂 Go visit Internal Revenue Code Section 6013(g) and (h) to read about this. You must be married to a U.S. taxpayer in order to make this work.
So the only way that an expatriate can become a resident alien is by spending too much time in the United States in a calendar year. Well, I guess you could become a citizen or green card holder again, too. But let’s ignore that.
In order to keep this email reasonably short, I will send you to the blog post that reader O commented about, where I talk about the substantial presence test (that’s what “too many days” is called in the Internal Revenue Code). Instead, I will give you the guiding principles here.
The first thing to remember is that you figure out your resident status on an annual basis. You might be a resident one year and a nonresident the next.
The second thing to remember is that this is an equation to be solved for a three year period. When you are figuring out whether you are a resident (or not) for this year, you will look at how many days you were in the United States in the current year, last year, and the year before that.
The equation you solve is this:
You are a resident of the United States in the current year if: (number of days in the USA in the current year) + (number of days in the USA last year)/3 + (number of days in the USA in the year before last year)/6 @#8805; 183.
The magic number is 183. When you solve the equation and the result is 183 or more, you are a resident for that year.
People get confused. They think the rule is a 6 month rule: spend 6 months in the United States and you are a resident. Not so.
It is “the sum of your calculations is greater than or equal to 183” rule. It so happens that 183 is ½ a day longer than half of the year. But keep in mind that we have an arithmetic problem here, not a “6 months in the USA” problem.
There are two numbers to keep in mind if you want to keep yourself safe from becoming a resident alien because of time spent in the United States.
Let’s say that you screwed up after you expatriated. You spent too much time in the United States and in doing so you made yourself into a resident alien, taxable on worldwide income.
There are two possible strategies that nonresident aliens can use to avoid resident status triggered by too many days in the United States. An expatriate is a nonresident alien. Under the current exit tax rules, there are no special rules that discriminate against expatriates.
You might be able to use a strategy called the “closer connection exception”.
Go look at Form 8840 and the instructions to that form. In general, if you can prove that your true home is outside the United
States (you have a closer connection to another country than your connection to the United States), AND you spent fewer than 183 days in the United States in the current year, you can opt yourself out of the substantial presence test.
This means that you were in the United States for fewer than 183 days in the current year, but when you did the three year mathematics the result exceeded 183.
Consider this as a possible way to pull (nonresident status) victory from the jaws of (U.S. tax resident) defeat if you end up spending a lot of time in the United States after you expatriate. If you successfully use this strategy, you are a nonresident of the United States for all tax purposes. (Compare that to the hybrid half-good/half-bad news for the income tax treaty strategy, described next.)
A second strategy is to use an income tax treaty as a trump card.
Find out if your home country has an income tax treaty with the United States. If it does, look at Article 4 (or Article 3 in a few very old treaties). This is a tie-breaker rule. If you can be claimed as a resident of two countries, this is how the two countries will resolve the problem so only one will tax you as a resident.
If this works, you will file Form 8833 with the IRS to claim nonresident status. Now you are not taxed on your worldwide income. However (and this is massive) for all other purposes you are a U.S. taxpayer. This means all of the invasive paperwork the IRS insists on … you have to file it. Yes, FBARs and the like.
Life would be a hollow joke, hardly worth living, if we did not have legal disclaimers. Here’s this week’s pre-emptive strike, designed to halt blame-throwers in their tracks:
Tax law changes all the time, and what the laws do depends entirely on the facts that you have. I’m not your lawyer because you didn’t hire me. Even if you pretend that this email proves that I’m your lawyer (heh, good luck) I wouldn’t be able to give you decent advice because I don’t know what’s going on in your life. Verily, I say unto thee, get thee hence and find ye an international tax expert. Don’t rely on this email as if it is the Gospel–it merely contains general information, for your knowledge and amusement. Or B-musement. I’m not sure which.
Next week I will answer another question about expatriation. Send me an email and ask me a question.