Finance

How to Know if You Need to Declare Your Income to the United States

25 August 2022 By Tom Andrews
iStock/nadia_bormotova

This tax advice is not intended, and cannot be used, to avoid any penalties as a result of taking any position from this column. Thomas Andrews is a CPA and a principal of AvMar Accounting Services. +1 954 764 0404; www.avmaraccounting.com

“Substantial Presence Test” is a phrase every non-resident crewmember should be familiar with. IRS audits of non-resident crewmembers are rare. However, I recently consulted on an audit in which a non-resident crewmember was found to have been liable for U.S. income tax on his worldwide income based on the number of days he’d spent in the United States. While the non-resident did argue that his income shouldn’t be subject to U.S. income tax due to his status as a non-resident crewmember, the argument was quickly dismissed as he was declaring himself a non-resident for tax purposes in his home country.

What many non-resident crew don’t realize is that they too might be required to declare their yachting income — not to their own country but to the United States. This requirement to pay tax might be triggered under the “Substantial Presence Test” (SPT).

You’re considered a U.S. resident for tax purposes if you meet the SPT for the calendar year. To meet this test, you must be physically present in the United States on at least 31 days during the current year, and 183 during the three-year period that includes the current year and the two years immediately before the current, counting:

  • All the days you were present in the current year, and
  • One-third of the days you were present in the first year before the current year, and
  • One-sixth of the days you were present in the second year before the current year.

There is one notable exception to the SPT for non-residents working on foreign-flagged vessels. However, this exception is for mariners of cargo ships and cruise ships in which they are only in the United States long enough to drop off cargo and passengers and then they leave.

Luxury yacht crew will likely be liable for income tax for income earned while working in the United States and quite possibly on their worldwide income if they trigger the SPT.

If crew find themselves liable for United States income tax, there’s comfort in knowing that most countries that have a tax treaty with the U.S. will allow the non-resident to claim a credit on their foreign-income tax return for taxes they have already paid in the United States.

If you’re a non-resident crewmember who is concerned about the SPT, consult a tax attorney or CPA for further analysis of your tax situation.

This article originally ran in the January 2022 issue of Dockwalk.

 

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