Substantial Presence Test

(the term every nonresident crewmember should be familiar with)

By Tom Andrews, CPA

Internal Revenue Service audits of nonresident crewmembers are rare however I recently consulted on an audit in which a nonresident crewmember was found to have been liable for United States income tax on their worldwide income based on the number of days they had spent in the United States.  While the nonresident did argue that his income should not be subject to United States income tax due to their status as a nonresident crewmember the argument was quickly dismissed as the individual was declaring themselves as a nonresident for tax purposes in their home country.

What many of the nonresident crewmembers do not 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 will be considered a US 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

  1.  31 days during the current year, and
  2. 183 during the 3- 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

1/3 of the days you were present in the first year before the current year, and

1/6 of the days you were present in the second year before the current year

There is one notable exception to the SPT for nonresidents working on foreign flagged vessels HOWEVER it 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 crewmembers 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 a crewmembers finds themselves liable for United States income tax there is comfort in knowing that most countries that have a tax treaty with the United States that will allow the nonresident to claim a credit on their foreign income tax return for tax they have already paid in the United States.  We recommend that if a nonresident crewmember is concerned about the SPT they consult with a tax attorney or CPA to provide a further analysis on their tax situation.

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