Can a Bermudian be subject to US individual income tax? There are a number of circumstances where a Bermudian may be subject to US income tax which this column will explore.

Salary If you visit the United States on business, to attend industry trade shows and conferences, to attend educational seminars, to visit the US parent company, or to meet with clients you may be subject to US federal (and possibly state) individual income tax.

The deminimus rule states that if a foreign national is physically present in the United States for less than 90 days and earns less than $3,000, the individual is exempt from tax. While most Bermudians will be in the US for less than 90 days, many will be subject to income tax because of the $3,000 test. To ascertain your US source income, you need to divide your salary (including bonus) by the number of work days in the year and then multiply this amount by the number of days you worked in the US.M For example, if you earn $96,000 a year and work 240 days a year, your daily earnings are $400. If you spend seven days working in the US, you are exempt from US Federal tax. If you spend eight days, you are deemed to have earned $3,200 and are subject to tax.

The rule is that simple. There are no exceptions. We receive many queries from Bermudians who feel that they are exempted from US income tax because they are only buying goods for their shops in Bermuda, or are only attending a conference. If your employer is paying you for being in the US, is reimbursing you for airfare, hotel expenses, etc., you are in the US on business, are earning a salary in the US, and are subject to US individual income tax and possibly state income tax.

If you are subject to US income tax you are required to file (by June 15, 1997) a Form 1040NR, reporting your US source income, and paying tax on that income. You will be entitled to a personal exemption of $2,550 and certain itemised deductions (which you will probably not have), and you will use the tax table for either single or married filing separately. The US Federal individual income tax rates start at 15 percent and progress to 39.6 percent.

State tax rates vary from O percent to 12 percent.

Interestingly, the most frequently asked question we will receive when this column is published is about where to obtain the necessary tax forms. One Form of which the visiting business person should be aware is Form 2063, commonly referred to as a sailing permit. While the predominant use of this form hearkens to the days when everyone left the US by ship, the law is still applicable. This form is supposed to be filed by all aliens leaving the United States as proof of payment of all US income taxes prior to departure.

Occasionally in the New York airports, and with increasing frequency in Miami and Los Angeles, the IRS will visit the airport and stop all departing aliens requesting this Form. While tax can be paid immediately (the IRS does not take credit cards), you will not leave if it is determined that tax is due. We have had clients call us from the Brooklyn House of Detention (not a pleasant place to spend the weekend) who did not heed our suggestion that it is far more worthwhile to pay the small tax.

Partnerships Can a Bermudian be subject to US individual income tax if they never spend a day in the United States? Absolutely. The US income tax laws dealing with sourcing of income and effectively connected income extend to individuals who are partners in a partnership who derives US source income. Rather than try to explain US tax laws, we will simply say that if the Partnership has effectively connected income with the US, the Partnership is not subject to US income tax, but the individual partners are. You definitely need to check with your US tax advisor if you are in this situation.

Investment Income US source capital gains are exempt from US income tax. Interest income from US banks, insurance companies and some US government securities is probably exempt from US income tax (check with your advisor). Dividends from US corporations are subject to a 30 percent withholding tax at source. If you only receive dividends and tax has been withheld, you do not need to file US income tax return.

Rental Income If you own rental property in the United States, your rental agent is required to withhold a 30 percent tax from the gross rent, before it is remitted to you. If you do nothing, this is the extent of the tax that is due. However, you do have the option of making an affirmative election to treat the rental property as a US trade or business. If you make this election, you will then be able to deduct from your gross income items such as mortgage interest, real estate taxes, brokers fees, insurance, depreciation and other related expenses. This will in all likelihood negate the income or bring that taxable income into the 15 percent bracket.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant about how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo CPA is the president of Expatriate Tax Services, PO BOx 617, Bernardsville, New Jersey and is associated with Gulfstream Financial Ltd. in Bermuda.

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