Snowbirds: Tax Consequences When Substantial Presence Test Isn’t Met

Are snowbirds required to file a U.S. tax return? In this week's article, Dr. Dean Smith shares tax requirements for those who don’t meet the substantial presence test.

First, it’s essential to determine if you meet the substantial presence test – guidelines are available here, as we covered them last week. If you have determined that you do not meet the substantial presence test, then you are not considered a U.S. resident for tax purposes.

In that case, if you have no U.S. source income, you would not be required to file a full tax return. You would have to file only a Form 1040NR, “U.S. Nonresident Alien Income Tax Return”; or Form 1040NR-EZ, “U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents,” if you had U.S. source income and the appropriate withholdings had not been made.

However, if you exceed 183 days under the Substantial Presence Test, you are deemed a U.S. tax resident, under U.S. tax law, from the first day of physical presence in the current year.

The Closer Connection Argument. If you exceed 183 days but remain a bona fide resident of another country (say, Canada), another form may help you avoid tax filing in the U.S. As long as you do not exceed 183 days in the current year alone, you may rely on the “closer connection” argument to state that you are not a tax resident of the United States. This declaration is made by filing Form 8840, “Closer Connection Exception Statement for Aliens.”

If Form 1040NR or Form 1040NR-EZ is being filed (because you have U.S. source income), Form 8804 should be attached to the return and filed by the regular due date (usually June 15) including extensions (December 15). If neither Form 1040NR nor Form 1040NR-EZ is being filed, the due date is the same as if you had filed Forms 1040NR or Form 1040NR-EZ.

Form 8804 reports the number of days of physical presence (over the current and prior two years) and what your ties are between the country of residence and the United States. Such ties would include the location of your permanent residence and vacation homes; location and type of investments; location of personal belongings (such as cars, furniture and clothing); current social, political and cultural or religious affiliations; business activities; driver’s licenses; health coverage and the jurisdiction where you vote.

If you factually have a closer connection to the other country, then, under the Internal Revenue Code, you are not a U.S. tax resident.

Dean Smith, PhD, CFP, TEP, CPA, CA, is a partner with Cadesky and Associates LLP and the President of Cadesky U.S. Tax Ltd. Cadesky is a boutique accounting firm that provides only taxation services. Dean has been involved with expatriate tax work for over 23 years, assisting companies moving employees around the world. Clients also include private individuals who have multiple jurisdictional filings. Dean is also an instructor and writer with Knowledge Bureau.

Additional educational resources: If you’re working with Canadian snowbirds who spend time in the U.S., you’ll want to ensure your technical tax and financial planning skills are up to date with Knowledge Bureau’s Cross Border Taxation certificate course and attend the May 2019 CE Summits to hear Dean Smith discuss planning for Canadians with assets in the U.S. You also can’t miss joining us in another Canadian retirement haven – Puerto Vallarta — for the 2019 Distinguished Advisor Conference (DAC) where this will be a theme.

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