Tax Residency: How Long Can I Be in the U.S.?

January 30, 2015

The answer is, you can stay in the U.S. as long as you want to, but there may be tax consequences to how long you stay there.

There is widespread confusion about residency which isn’t surprising. The word, “residency” is interpreted differently depending on whether you are talking about tax, immigration, health insurance, etc. Even within tax law, Canada, the U.S. and the Canada-U.S. tax treaty all have different interpretations of what constitutes residency.

This article is about US tax residency under US tax law. US tax law has objective standards of what constitutes a tax resident of the U.S. US tax residency rules only apply to individuals who are not U.S. citizens. When an individual is determined to be a tax resident of the U.S., they will be taxable in the U.S. on their worldwide income unless the Canada-U.S. tax treaty determines otherwise.

If an individual is a lawful permanent resident of the U.S. (better known as a “green-card” holder) he or she is a resident of the U.S. for tax purposes regardless of where he or she actually resides. Green-card holders who do not live in the U.S. should be very careful about their U.S. tax filing obligations and their exposure to U.S. tax.

An individual can also be a resident of the U.S. if they meet the Substantial Presence Test better known as the “183 day test”. It states that if an individual spends more than 182 days present in the U.S. in a year, they are a tax resident of the U.S. For this purpose any part of a day in the U.S. (including in US airspace and US waters) counts as a day. Certain days may be excluded for the purpose of this test.

Less well understood is that a person may be physically present in the U.S. for less than 183 days in the current year and still be determined to be a U.S. resident for U.S. tax purposes. The alternative computation for the Substantial Presence Test is to sum the following amounts after rounding up to the nearest whole number:

  • Number of days present in the U.S. in the current year;
  • Number of days present in the U.S. in the preceding year divided by three, and;
  • Number of days present in the U.S. in the second preceding year, divided by six.

Where an individual averages over 120 days a year in the U.S., the sum of their days present in the U.S. under the alternative computation will exceed 182 days.

Where the sum of these amounts exceeds 182 days, the individual will be a U.S. resident for U.S. tax purposes provided they spent at least 31 days in the U.S. in the current year. An exception applies where an individual spent less than 183 days in the U.S. in the current year and can establish that they had a closer connection to a country other than the U.S.

In order to establish that an individual has a closer connection to a country other than the U.S., the individual must timely file IRS Form 8840, Closer Connection Statement for Aliens. IRS Form 8840 is due on or before June 15th (or the next business day if it falls on a weekend or holiday) of the year following the year in concern. The IRS may accept a late filing of IRS Form 8840, but is not obligated to do so.

Where an individual does not file IRS Form 8840 or fails to establish a closer connection with a country other than the U.S., the Canada-U.S. tax treaty may be available to determine that the individual is a resident of Canada. However, when individuals rely on the tax treaty to avoid US tax residency it may adversely affect the status of their green-card, if they have one, and subject them to U.S. tax reporting obligations as if they were in fact a US tax resident. Such individuals would still only be subject to U.S. tax on their US source income but would have significant disclosure obligations and even more significant penalties if they fail to file.

The bottom line, individuals who spend less than 183 days in the U.S. in any year should determine if they are required to file IRS Form 8840. If you failed to do so in prior years, you should file a late IRS Form 8840 to avoid adverse US tax circumstances in those years. The statute of limitations does not begin to run if no tax return is filed.

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