Avoid U.S. Taxpayer Status After Expatriation

Substatial Presence Test : Max 183 days/year or 121 days/year for 3 consecutive years.
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.

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:

• Never spend 183 days or more in the United States in any one year; and
• If you return to the United States year after year, and if you want to be safe, keep the number of days in the USA to 121 (or fewer) every year.
  
   

The Old Rule

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

Expatriates: Neither Citizen Nor Green Card Holder

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 2 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 2 ways an expatriate can become a U.S. resident for tax purposes:

• By deliberately choosing to become a U.S. taxpayer; or
• By spending too much time in the United States.

If you voluntarily choose to be a U.S. taxpayer again (taxable on your worldwide income), 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.

Too Many Days In the USA

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.

Principle Number 1: Figure It Out Annually

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.

Principle Number 2: Three Year Average

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.

Principle Number 3: Remember 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.

• You can hit 183 as the answer to your arithmetic problem by staying in the United States for 183 days in a single calendar year.
• You can also hit 183 as the answer to your arithmetic problem by staying in the United States for a number of days over a three year period, even though you were never in the USA for 183 days in any one year.

Safety Numbers: 30, 121

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.

• 30 days. If you spend 30 or fewer days in the United States in any calendar year, it is impossible for days of presence to cause you to be a resident alien for that that year, taxable on your worldwide income.
• 121 days. If you spend 121 days or fewer in the United States year in and year out, you will never be a U.S. resident for income tax purposes. You can prove this to yourself by plugging in 121 as the number of days for all three years in

 the equation noted above. You will see that the total is just under 183. For kicks, plug in 122 for all three years and see what happens.

Nonresident Status When You Spend Too Much Time in the U.S.

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.

Closer Connection (Form 8840)

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.)

Income Tax Treaty (Form 8833)

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.

1. 26 U.S.C. §877(g)(1). Emphasis added. ↩
2. 26 U.S.C. §877(h). ↩