Global markets have focused on US taxation issues of late, and quite naturally, all those still holding investments are hoping that a George W Bush tax cut will provide a stimulus to the US economy and a rise in equity market value. How will a tax cut affect the average US consumer? Each year income taxes are withheld from every working man, woman and child's wages according to a tax liability prorated formula. Actually, the methodology is not that simple, nor are income taxes the only taxes assessed.

Collection of taxes drives the nation; indeed, with more than 67,000 pages of US tax code, interpretation of tax law is great job security for large numbers of full-time tax experts. Simplistically, the US citizen (or resident) individual's tax liability is front-end loaded. The US Treasury pays no interest for the use of their money, yet each year millions of taxpayers use the tax refund system as forced savings.

If George W passes another tax credit, individual taxpayers may receive an even larger refund. They may feel wealthy then - all 180 million that do file tax returns - heading immediately to the malls for a shopping spree. That is the principle behind White House economic theory, but not necessarily what will happen. Taxpayers feel poor right now and may save instead, defeating all politically expedient reasoning.

Uncle Sam knows your business even if you aren't American: The United States taxes US citizens and residents on world-wide income; those "deemed" residents may also be facing tax issues. Uncle Sam wants everyone who receives the privilege of residing in the "land of the free and the home of the brave" to pay their fair share. Bermudians and other nationalities alike have long felt that "what I own in the US, when I go to the US and how long I stay is my business". It is often assumed that if the stay in the US is less than 183 days in any calendar year, they are not considered residents. Readers, that is not quite how it works.

Non-residents are only liable for US return filing and taxation if they have more than 90 days of US presence in a tax year, or greater than $3,000 of compensation for work performed in the US. If a non-resident exceeds either of these requirements, they will still be eligible to file as a US non-resident for tax purposes until they exceed the 31/ 183 day substantial presence test. Once the 31 day / 183 day test is met, the non-resident will at least be considered resident for a portion of the year.

For further clarification (which really further confuses) in general, here is the 183-day Substantial Presence in the US rule,

a) You have at least 31 US days of presence in the current year and;

b) You have 183 days during the three year period including the current year and the two years prior to that counting

c) All the days you were present in the current year

d) One-third of the days you were present in the year prior to the current year

e) One-sixth of the days you were present in the two years prior to the current year.

What if you have planned to spend 183 days in the US this year and have done so in prior years ? Are you over the limit? What is the exact determination? How will IRS ever find out? Since 9/11, inbound and outbound US activity is being scrutinised more closely than ever (subject of another article). Miscalculate the rules above and you could wind up with a request from US Internal Revenue Service to explain why you should not be classified as a US resident, subject to taxation - for all the years they may deem you to be a US resident.

Uncle Sam never forgets you: These US citizens living abroad have grown older. Suddenly going home is very appealing, and with good reason: US lower cost of living, Social Security provisions and US Medicare health insurance. Under a proposed new tax bill, HR 5063, the Armed Forces Tax Fairness Act of 2002 promotes significant changes to current individual expatriate tax law under section 877. These changes will impact both US citizens, and former long-term residents who wish to expatriate (leave the US) and those who want to come back.

The more onerous amendment is proposed for US immigration relating to former US citizens who seek re-entry into the United States. If this group seeking repatriation has failed to comply with the tax provisions, they may be classified as inadmissible aliens.

At this date, if you are inadmissable, it is unclear what recourse you may have. Times have changed; Bermuda is no longer a fishing village. George Bush, the US Congress and Senate are sending a message, if you want their support, you support them.

If you fit (or know of someone who may) either of these situations above, I strongly urge you to consult now with a CPA tax professional - Ernst & Young has an expatriate tax specialist, Chris Larkin, CPA, or call KPMG, or PWC tax departments. Do not work with any tax person who has no physical tangible presence in Bermuda, you may regret it. Get your financial affairs in order now.

@EDITRULE:

Martha Harris Myron CPA CFPT is a Bermudian, a Certified Financial PlannerT(US licence) practitioner and VP, Personal Financial Services, Bank of Bermuda. She is a former US tax practitioner. She welcomes questions, which can be sent to to marthamyronnorthrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda.

Under no circumstances is this advice to be taken as specific tax advice, or as a recommendation to buy or sell investment products or as a promotion for financial plans.