- 1 Tax Planning is Needed for Snowbirds in the United States
- 2 What is the Substantial Presence Test?
- 3 US Sourced Income is Taxable
- 4 Capital Gains for USRPI still Taxable
- 5 Closer Connection Exception Has Limitations
- 6 Do Not Apply For a Green Card
- 7 Golding & Golding: About Our International Tax Law Firm
Tax Planning is Needed for Snowbirds in the United States
It is not uncommon for foreign national non-residents who are nonresident aliens to want to spend time in the United States, especially during the cold winters. These types of individuals are referred to as snowbirds — and oftentimes come to the United States from countries such as the UK or Canada for a certain amount of time each year – – usually on a travel tourist visa such as a B1/B2. For the most part, as long as the taxpayer does not spend more than 183 days in the current year in the United States, then they can avoid meeting the Substantial Presence Test. But, the problem becomes if the Taxpayer comes to the United States often enough that they meet the substantial presence test –– which essentially amounts to little more than 121 days each year, and at least 31 days in the current year – – they may become subject to US tax on their worldwide income, as well as fall prey to global reporting requirements, such as FBAR and FATCA. For snowbirds considering relocating to the United States during the cold winter months abroad, here are five important US tax facts.
What is the Substantial Presence Test?
The United States is one of a few countries that taxes individuals on their worldwide income based on their US person status and not just if they are actual residents of the United States or not. While US citizens and lawful permanent residents are taxed on their worldwide income — and required to report their global assets — non-permanent residents can also be taxed the same way in any year they meet the substantial presence test. Therefore, if you are a snowbird residing temporarily in the United States it is very important to avoid meeting the substantial presence test, because if you do — and unless an exception applies — you will become subject to US tax on your worldwide income and required to disclose your foreign accounts, assets, investments, and income.
US Sourced Income is Taxable
Even if you do not need the Substantial Presence Test, you are typically still taxed on your US sourced income even if you were a nonresident alien. Therefore, it is important that nonresidents assess the types of investments they are getting involved in in the United States to determine whether the income is taxable or not. For example, from a baseline perspective — US capital gains and interest income are not taxable under US tax law to a non-resident alien, whereas dividends would be taxable to NRAs –– which could mean the difference between, for example, owning a bond (that generates interest) versus investing in a bond fund (that generates dividends)
Capital Gains for USRPI still Taxable
Even though most US capital gains are exempt from tax for non-resident aliens, this does not apply to all capital gains in the United States. The biggest exception involves US real property in accordance with FIRPTA (Foreign Investment in Real PropertyTax Act) — there are several requirements and certain withholding obligations for nonresident aliens who want to sell US property. For example, sometimes it is better for nonresident aliens if applicable to lend or gift the foreign money to a US person relative (who then files a Form 3520), and many of these issues can be avoided.
Closer Connection Exception Has Limitations
Even if a person meets the substantial presence test, presuming that they are in the United States less than 183 days in the current year, they can usually still qualify for the closer connection exception – presuming that they can show significant contacts with a foreign country or countries, using a typical totality of the circumstance type of analysis. If a person has their main primary residence in a foreign country and spends the majority of their time abroad in that county — this will normally be sufficient.
Do Not Apply For a Green Card
One very important component of meeting the closer connection exception is that the Taxpayer cannot have applied for a green card. Therefore, if the nonresident alien is considering becoming a permanent resident of the United States they should assess the income in the current year and plan for how many days they intend on staying in the current year to avoid any unnecessary tax treatment based on the fact that they would not qualify for the closer connection exception if they have already apply for a green card.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.