Planning to Avoid US Income Tax Residence

As most experienced travelers to the US know, US income tax residence means that you become subject to US tax on your worldwide income and is to be avoided in most cases. Many regular seasonal visitors to California from abroad are also aware that the manner in which US income tax residence is determined for a foreign citizen differs dramatically from the tests used for California tax residence. Assuming that you are neither a dual citizen nor a US green card holder, your US income tax residence status is determined using the “substantial presence” test, which is a weighted-average, day-counting formula applied over a rolling, three-year period. That formula weights days of presence in the current tax year at full value, days of presence in the immediately preceding tax year at 1/3 value and days of presence in the second preceding year at 1/6 value. If the application of the formula produces a number that is 182 days or fewer, you are not a resident under the “substantial presence” test for the year in question.

Applying a few “rules of thumb” for purposes of illustration, if you spend fewer than 121 days in the US each year, you will not become a U.S. income tax resident under the “substantial presence” test formula. Even if you spend more than 121 days each year in the US and your weighted-average days of presence exceeds 183 days under the formula for any year, US income tax residence may nevertheless be avoided, subject to two conditions. Those conditions are that you were here fewer than 183 days in the tax year in question and that you timely file with the IRS a Form 8840 Closer Connection Statement, demonstrating your comparatively stronger connections to your country of residence than to the US for that year. Finally, if you’re present in the US on more than 183 days in any tax year, you may still avoid US taxes on your worldwide income as a “dual resident,” if you qualify for tax treaty protection as a “Treaty Nonresident”– see discussion on our page entitled “Dual Resident Tax Planning.”

Please note that, in applying the “substantial presence” test formula, some days of presence in the US may by excluded, if they qualify for any of several special exemptions from day-counting (e.g., they occurred during a medical condition that arose while you are here, during Pandemic-related travel restrictions or in commuting to US employment or self-employment from Canada or Mexico).

At Lance Cross-Border Law and Tax, we can assist you with “Closer Connection” Statement filings, “substantial presence” test computations and evaluation of whether you qualify for an exemption from counting certain days of presence in applying the “substantial presence” test formula. We can also assist you to apply special rules determining when residence begins in your first year of residence and when residence ends in your last year of presence. Finally, we have decades of experience working with and interpreting tax treaties and can counsel you about whether you qualify for treaty protection and may remain a “Treaty Nonresident,” despite becoming a US internal law resident under the “substantial presence” test. We welcome inquiries concerning your specific tax situation. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries without any obligation.