Heading South for the Winter? 6 Financial Tips for Snowbirds

People’s need for financial assistance does not necessarily end when they reach retirement; people who ‘winter’ in the sunnier parts of the United States can benefit from the financial tips for snowbirds offered in this blog.

Of course, snowbirds have many financial concerns:

  • Income taxes
  • Real estate purchases
  • Health insurance

Our experience can help guide them and provide peace of mind.

Here are some key considerations that every snowbird should remember.

Don’t Overstay Your Welcome

The biggest concern is whether living part of the year in the United States will require you to pay US taxes.

The key to staying exempt from paying taxes is to make sure you don’t overstay.

What’s the limit? Canadians may stay in the US for 182 days in any given year.

If you stay beyond the 182 days, you may be considered a US resident who must pay taxes to the Internal Revenue Service (IRS).

“Substantial Presence” and “Closer Connection”

In addition to the 182-day rule, the IRS uses another formula to determine a visitor’s tax status.

The IRS also looks at a visitor’s time spent in the US over the past three years to determine if the person has a Substantial Presence in the country.

In truth, most snowbirds would be captured by the “substantial presence” formula and would be looked at as a Deemed Tax Resident and may be taxable to the IRS on their worldwide income.

Of all the financial tips for snowbirds, this is arguably the most important. Don’t worry – there are a few ways (yes, it’s very legal and very legitimate) to exempt yourself from the substantial presence test.

If you are present in the United States for less than 183 days in the current year, the solution lies in Form 8840 – the Closer Connection Exemption Statement for Aliens. This form tells the IRS that the person maintains “closer connection” with Canada, that you have a home, family and connections there, and that you already pay taxes in your home country.

If you are in the United States for more than 182 days in the current year, the use of the Closer Connection Exemption Statement for Aliens will not exempt you.  You still may be a Deemed Tax Resident.  You may be exempted from being taxed on your worldwide income by the IRS by filing a US 1040NR individual income tax return.  You would report any US source income and claim tax treaty exemption for your non-US source income under the Canada-US Tax Convention, Article IV – Residence, Paragraph 2 – Treaty Tie Breaker Rules.

Some people worry that submitting a Form 8840 will alert the IRS to your annual visit to the US, but the truth is, it’s a good way to prevent any confusion and declare yourself exempt from US taxes.

Health Care Matters

Health care is another issue to consider.

Canadian residents enjoy provincially funded health care benefits, but those benefits have a residency requirement, which may be affected if you live outside the country for an extended period.

For Ontario residents, the limit is to be outside of Canada 212 days per 12-month period.

Just like the taxpayer residency, we recommend keeping your Canadian residency within the regulated timelines to maintain your access to health care benefits.

Snowbirds should purchase additional health insurance should they fall ill outside of Canada. Please be aware – insurance companies will often choose to fly patients back to Canada rather than pay US hospitals.

Pay Attention to Currency Risk

The US and Canadian dollars fluctuate constantly.

Snowbirds who are relying on a Canadian-dollar cash flow to pay their US expenses may be surprised by changes in the value and purchasing power of their money.

A good practice is to buy US dollars when the Canadian dollar is strong. That gives snowbirds an opportunity to put money into their US dollar accounts and protect against future drops.

Purchasing US Real Estate

Snowbirds commonly test the waters living in the US for a few winters before deciding to take the plunge and buy property.

Purchasing real estate in the US has differences to which Canadian buyers may not be accustomed. Some of the terms are different. But most importantly – it’s the tax structure with which most people are unfamiliar.

The biggest concern is the estate tax that the US levies on property owners upon their death. If you’re a resident in Canada, not a US citizen, purchasing property in the US, you could be liable for US estate taxes on that property when you die.

The solution to avoiding estate tax lies in the ownership structure. While every situation is different, depending on your citizenship, whether your spouse is co-owning the property, and whether you will earn rental income from the property, a proper accounting firm can provide some financial tips for snowbirds along these lines.

Financial Tips for Snowbirds – Be Ready!

The final piece of advice for snowbirds is to be ready with your documentation on hand when you enter the United States. The US Customs and Border Protection (CBP) is becoming more accustomed, informed and knowledgeable about snowbird issues.

It’s a good idea to keep your documentation in a binder and have it ready for the CBP official to review. It shows that you are organized and it goes a long way to avoiding a difficult series of questions.

Your Turn

Are you a snowbird?

How have you addressed the taxation and health insurance requirements for living in the US part of the year?

Leave a comment below.