Visa visitors and any visitor to the U.S. can, without realizing it, become obligated to pay U.S. income tax on world- wide income, and possibly estate tax on world-wide assets. Income tax and estate tax treaties might offer some relief but these do not serve to ease the pain of becoming an inadvertent U.S. tax payer.
The U.S. has for several years had a "bright line" test for U.S. residency, with very limited exceptions. Internal Revenue Code (Section 7701(b)) provides that a visitor (Alien) becomes a "Resident" for tax purposes in two ways: by the "Green Card" (permit for permanent residency) which classifies the holder as a US Resident, regardless of whether such person lives in the United States or abroad, and the "substantial presence " test, which can be the unpleasant surprise.
The "substantial presence" test is met if:
The person spends 183 days or more in the United States during the taxable year, OR
If the person is in the United States for 183 days as determined under the following formua:
(a) Current year: 1 x the number of days in the US;
(b) First preceding year: 1/3 x the number of days in the US;
(c) Second preceding year: 1/6 x the number of days in the U.S.
Just for example, one fails the substantial presence test if here for 90 days in the current year, and 90 days the year beforre and 90 days the year before that.
(a) Current year: 90 days
(b) First preceding year: 1/3 x 90 days equals 30 days
(c) Second preceding year: 1/6 x 90 days equals 15 days
TOTAL 135 days
How does the IRS find out? Maybe never, but a passport may provide a good record, and there is the possibility, however remote, that immigration might check. California is an aggressive tax collector, and if successful the IRS is automatically alerted.
There are limited exceptions to this test, including for government workers, teachers, for medical purposes, and for athletes in a charitable event. Another important exception is that, if one is in the U.S. for less than 183 days in any tax year , that person has the opportunity (in a tax return) to establish, to the IRS's satisfaction, that for that current year he or she has a "tax home" and "closer connection" to a foreign country. The requirements to establish these exceptions are beyond the scope of this letter, but note that tax treaties normally provide "tie-breaker" rules to determine residency in following order:
(a) Permanent Home, and if a permanent home is available in both countries, then
(b) The country in which the individual has his/her "center of vital interests", and then
(c) The Country of "habitual abode", and then
(d) The Country of Nationality.
These "tie-breaker" rules are somewhat vague and difficult in practice to apply to the satisfaction of the IRS. Of course, it helps to be paying taxes in another Country, so claiming a tax haven country as the primary residence and "closer contact" may not be persuasive.
U.S. estate tax is based on "domicile" and not residency, and that type of planning is not covered in this Letter.
California has its own rules, and the Franchise Tax Board (FTB) presumption is that one is a California resident if (1) here for other than a temporary purpose; or (2) if otherwise previously resident, outside the State for a temporary purpose. The FTB also presumes residency if a person is here for 9 months. Long term absence from California might not remove the State tax obligation if one is still "domiciled" in the State; "Domicile" can be essentially defined as the place to which one has the most permanent connection and/or the place one intends to ultimately return. Certainly a subjective test and the taxpayer as always has the burden of proof. One can appeal an adverse Franchise Tax Board decision to the California Superior Court, an expensive and unsure undertaking.
There are few reported court cases to give guidance on California tax exposure. One case (Whitell) had rather typical facts. The couple stopped paying California tax when they acquired a Nevada residency, but they kept their California home and business, and their California professional contacts. The appellate court found them to be California residents for the years in question.
Another illustrative case (Klemp) involved an Illinois couple who bought a house in Rancho Mirage, and spent much of their time there, (over 100 days a year and in at least one year, 186 days). But, they maintained their bank accounts and professional contacts (CPA and Attorney) and business contacts in Illinois, and they filed Illinois tax returns. Even though they had rented their Illinois home, the Court found them to be California Tourists and not California residents. Obviously, facts are all important.
The reported court cases may not offer definitive guidelines, and neither do the FTB administrative rulings, which include the following nonexclusive list of factors to be considered for California residency:
Location and values of residences
Location of spouse and/or minor children
State in which the property tax homeowner's exemption is clamed
Days in the State, and purpose
Origination of credit card charges, etc
State of most connections, professional, business, social
Registration of automobiles, and drivers license
Any one item is obviously not conclusive. It is not too uncommon for people to attempt to escape the California tax system before a large capital event. Timing is of course important, and leaving the State a few weeks before the capital event might be dodgy. However, leaving for other than a "temporary purpose" can be accomplished with careful advance planning.
"Aliens" should be aware of the potential for both U.S. and California tax exposure. U.S. Citizens seeking to escape or avoid California tax need to plan ahead. As we say for most things, "nothing is easy", and this adage certainly applies to taxes.