We are continuing with our series on how the US taxes non-US citizens who visit the US regularly. In the Palm Springs area for instance, we frequently see Canadians who maintain a local property for a good chunk of the winter months. For those Canadian citizens who are not lawful US residents, and do not have a green card, they must stay mindful of the amount of days actually spent in the US. An individual who establishes a “substantial presence” in the United States can make him or herself subject to US tax on their worldwide income (i.e., a potential tax on income of a foreign citizen which otherwise has no connection to the United States). An individual has a substantial presence in the US if the individual is present in the US at least 31 days during the current year and at least 183 days for the three-year period ending on the last day of the current year, using a weighted average approach. The mechanics of this test were discussed in Part I of this series. Even if an individual establishes a substantial presence in the US in a given year, that person can still avoid being subject to US tax by declaring a “closer connection” to a tax home in another country. To accomplish this, the foreign citizen individual must file a Form 8840 with the IRS (the “Closer Connection Exception Statement”).
Even if the individual meets the substantial presence test, the individual can be treated as a nonresident alien (and not pay US tax on their worldwide income) if the individual:
1) is present in the United States for less than 183 days during the year;
2) maintains a tax home in a foreign country during the year, and 3) has a closer connection during the year to the tax home in the foreign country.
Tax Home The tax home of an individual is first and foremost the location of his regular place of business, employment or post of duty regardless of where the individual maintains his family home. If the individual is not engaged in any business, the visitor’s tax home is his regular place of abode.
Closer Connection A frequent visitor to the US will be considered to have a closer connection to another tax home (e.g., Canada) if he maintains more “significant contacts” with the other country and not with the US. Other factors considered in making the closer connection determination include the location of the individual’s main residence, where the person’s family resides, personal belongings, routine banking activities and organizations to which he belongs.
An individual is not eligible for the closer connection exemption if any of the following apply:
1) The individual was present in the United States 183 days or more in the most recent calendar year.
2) The individual was a lawful permanent resident of the United States (a green card holder).
3) The individual has applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.
The Closer Connection exemption is available only to those individuals who file the Form 8840 Closer Connection Exception Statement by June 15 for the previous calendar year. Again, the purpose of the Form 8840 is to demonstrate to the IRS that although an individual spent too much time in the United States so as to pass the “substantial presence” test, he or she should be exempt from US tax on their worldwide income because the person has a closer connection to a country other than the US. Part IV Form 8840 asks a series of questions designed test the closer connection assertion. The form asks questions such as: (a) where is your family located; (b) where is your automobile located and registered; (c) where is your driver’s license issues, etc. These questions are likely easily answered favorably for the Canadian citizen who truly is merely a regular visitor to the US, but might have stayed a little too long.