Tax Form 8840 Closer Connection Exception Statement
Are you a U.S. citizen or green card holder who spends significant time abroad each year? If so, it’s important to understand the Closer Connection Exception Statement on tax form 8840. This little-known provision could save you quite a bit of money come tax season! In this blog post, we’ll break down what exactly the Closer Connection Exception is and how you can take advantage of it.
To start with, this form is not simple, as it comprises a specific due date. But, it is an essential part of the taxation that one has to endure when one becomes a legal US citizen or a legal permanent Resident. This is because then these individuals are subjected to worldwide income and asset reporting.
Essentially, when a foreign individual resides in the US, they are not automatically subjected to the IRS foreign asset reporting requirements or the US taxes on worldwide income. However, the case slightly changes, as and when the foreign national meets the substantial presence test. This is because they then become the US person for tax purposes. However, there are chances that the individual can easily circumvent the US person’s tax status by filing the tax form 8840. This is because it becomes easier for the individual to claim that they have a closer connection to the foreign country or various countries.
Currently, the IRS has been aggressively taking great measures towards foreign accounts compliance. This is in addition to the increased issuance of offshore penalties as the US person status can be quite detrimental for foreign nationals. However, one can easily avoid these penalties with the application of offshore voluntary disclosure.
What is the Main Purpose of Tax Form 8840?
The main purpose of this particular form is to be able to claim a closer connection to a foreign country exception or exceptions to the substantial presence test. Let us take a look at the Regulation Section 301.7701(b)-2
Read More-: Tax Form 8833
What is Regulation Section 301.7701(b)-2?
This regulation section deals with the closer connection exception.
- Generally speaking, an Alien who meets the substantial presence test, might nevertheless be considered an Alien for the following year, in case the following conditions are not met:
- The individual has stayed in the US for less than 183 days in the current year.
- A tax home has been maintained by the individual in a foreign country for the current year
- Except for the clause in paragraph (e) of this section, the person has a closer connection to a single foreign country during the current year in which they have maintained the tax home as compared to the US.
- The Foreign Country
- For the case of section 7701 (b) and the regulations stated under it, the term ‘foreign country’ if used in the geographical sense includes any boundary or territory that falls under the sovereignty of the United Nations or a government other than the US.
- This also includes the territorial waters of the foreign nation which is determined in accordance with the laws of the United States and also the seabed and subsoil of the submarine locations that are adjacent to the territorial waters of the foreign nation. The foreign nation has exclusive rights over such areas, according to international laws. This is with respect to the exploration and exploitation of natural resources. Also included as such are the territories and the possessions of the US.
Need Experts Help -: When are Taxes Due? 2022 Tax Deadlines
The Tax Form 8840: The Information within
Now, let us take a look at the information one needs to take a look at in the form:
Part 1: General Information
As the name suggests, this comprises the basic and general information:
- The date the person entered the US and the type of US visa: F, J, M
- The country or the Countries you are a citizen of for the tax year.
- The country or the countries that issued the passport to the individual
- The passport Number of the individual
- Enter the number of days the individual was present in the US: 2019________2018____2017______.
- Did the individual apply for or took any affirmative steps to apply for, the lawful permanent resident status in the US or has a pending application to change the status to the lawful permanent resident for the year 2019?
Part 2: Closer Connection to One Foreign Country
This is part of the form that deals with the closer connection to one foreign country test. Essentially, the Internal Revenue Service needs to know where the tax home of the individual was during the tax year at issue, in the name of the foreign country.
- Your tax home during the year 2019.
- To enter the name of the foreign country to which the individual had a closer connection than the United States during the year 2019.
Part 3: Closer Connection to Two Foreign Countries
There are cases when the individual has a closer connection with one or more countries. Hence in this case then this particular portion of the form deals with the details of the countries in question, the status in each country and if the tax returns have been filed in those countries or not.
- Where was the Tax Home on January 1, 2019?
- Where was the tax home during the remainder of January 1, 2019, after the location of the tax home was changed?
- Did the individual have any closer connection with each foreign country listed on lines 9 and 10, than to that of the United States for the duration for which the tax home was maintained in that foreign country?
In case the answer is ‘No’ then, you need to attach an explanation:
- Are you subject to taxation as a resident under the Internal law of
- Either of the countries listed on lines 9 and 10 during the entire of 2019.
- both of the countries that are listed on lines 9 and 10 during the time the tax home has been maintained in each country.
Has the individual in question filed or will the tax returns for the year 2019 for the countries listed on lines 9 and 10? If ‘yes’ for either line 12 or 13, then you need to attach the verification.
In case the answer is ‘No’ for either line 12 or 13 then you need to provide the right explanation.
Part 4: The Important Contacts with the Foreign Country or Countries
This is perhaps one of the most important parts of the tax form 8840. In this part of the form, the taxpayer needs to provide the detailed personal information required for the Internal Revenue Service to be able to determine if the taxpayer meets the substantial presence test. There are a few questions that the taxpayer will need to answer such as:
- Where was the regular or principal permanent home located in 2019?
- In case the individual has more than one permanent home available for you at all times, during 2019, you need to list the location of each of these.
- Where is your family located?
- Where are your automobiles located?
- Where are these automobiles registered?
- Where are the personal belongings, furniture and others located?
- Where are the banks with which the individual has conducted the personal banking activities located?
- Have you conducted any business at locations other than your tax home?
- If ‘yes’ where?
- Where have you issued the driver’s license from?
- In the case of a second driver’s license, where have you issued that from?
- Where have you registered to vote?
- During the completion of the official documents and forms what country has been listed as your residence? Have other forms like W-8BEN or W-8 forms also been completed?
- Form-9; this is the request for the identification Number and Certification of the taxpayers.
- Other US official forms? If ‘Yes’ you need to indicate the forms
- In Which country or countries have you kept your personal, legal and financial documents?
- Which country have you derived the majority of the 2019 income from?
- Do you have income from any US sources? If ‘Yes’ then what type?
- Have you qualified for any type of ‘national’ health plan that has been sponsored by a foreign country?
- If ‘yes’, name the country.
- If ‘No’ You need to explain.
- In case of any other information is required to substantiate the closer connection to a country other than the US or you need to explain in detail the response to lines 14 through 30, you need to attach the statement to this form.
Also Read-: Tax Form 8938
The tax form 8840 needs to be filed by June 15th of the following year and needs to be filed on an annual basis. Failing to do so, can lead you to be considered as a US tax resident for the year and will not be able to claim the closer connection exception. However, in case you still have doubts regarding the same, feel free to reach out 1800 964 3096 to us and we will be more than happy to help you out.
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💠Frequently Asked Questions💠
What is Meant By Tax Home?
This is the main place of business, employment or duty post irrespective of where your family home is maintained. This is the place where the individual indefinitely or permanently works either as a self-employed or an employee. In case the individual in question does not own a main or regular place of business due to the nature of the work, then the tax home is the place where the individual lives regularly.
What is a Substantial Presence Test?
This is the test where the Canadian Snowbirds usually fall into trouble. This is essentially a formula that determines if you can be regarded as a US resident for taxation purposes concerning the days you have spent in the US over a rolling three-year period.
The individual has met all the requirements for the Substantial Presence test if:
🔹 You have been in the US for a minimum of 31 days for this Calendar year.
🔹 The Sum of the following is 183 days or more:
🔹 The number of days for which you have been in the US for this Calendar year
🔹 ⅓ of the number of days for which the individual was in the US last calendar year
🔹 ⅙ of the number of days the individual was in the US the calendar year before that
With the help of this formula, it is necessary to show that 122 days have been spent by the Canadian Snowbird in the US and can be considered a US tax resident in this case.
Are there any Exceptions to the Substantial Presence Test?
Yes, there are a few exceptions to the test in case of when:
🔹 The individual is present in the US for less than 183 days for the year
🔹 Owns a tax home in a foreign country
🔹 Owns a closer connection to this foreign country
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