Navigating the complexities of the IRS Substantial Presence Test can be daunting, but understanding it is crucial for anyone looking to establish residency in the United States for tax purposes.
The IRS Substantial Presence Test is a criterion used to determine if an individual qualifies as a resident alien for tax purposes in the United States. You must be physically present in the U.S. for several days over three years to meet this test. Specifically, you need to be present for at least 31 days during the current year and 183 days over the last three years, including the current year. For a detailed guide on navigating this test and potentially avoiding being classified as a U.S. tax resident, check out our article on Counting Days: Substantial Presence Test Tips.
The days are calculated using a specific formula: all the days you were present in the current year, one-third of the days you were present in the previous year, and one-sixth of the days you were present in the year before that. Meeting these requirements can significantly impact your tax obligations in the U.S.
Calculating your substantial presence involves a straightforward but meticulous process. First, count the days you were physically present in the United States during the current year. Add one-third of the days you were present in the previous year and one-sixth of the days you were present in the year before that.
For example, if you were in the U.S. for 120 days in the current year, 150 days in the previous year, and 180 days the year before, the calculation would be 120 + (150/3) + (180/6). This totals 180 days, which means you meet the substantial presence test. Accurate travel records are essential to ensure the calculation is correct.
Several exceptions to the Substantial Presence Test might apply to you. For instance, days when you are in the United States as a teacher or trainee under a J or Q visa, a student under an F, J, M, or Q visa, or a foreign government-related individual may not count towards the substantial presence calculation. To learn more about how you can legally avoid worldwide taxation in the US through these exceptions, read our guide on Avoiding Worldwide Taxation Legally in the US - Exempt Individual.
Additionally, if you cannot leave the U.S. due to a medical condition that arose while you were in the country, those days might also be excluded. Being aware of these exceptions is crucial as they can alter your residency status and subsequent tax obligations.
Meeting the Substantial Presence Test means you are considered a U.S. resident for tax purposes. This designation means you are subject to U.S. income tax on your worldwide income, much like a U.S. citizen. This can include income earned from foreign sources, which may also be subject to double taxation unless there's a relevant tax treaty between the U.S. and your home country. For strategies to legally avoid this worldwide income tax, check out our article on How to Legally Skip Worldwide Income Tax in the US.
Being a U.S. tax resident also means you must comply with all the relevant tax filing requirements, including the possibility of filing additional forms, such as the Foreign Bank Account Report (FBAR), if you have foreign financial accounts exceeding certain thresholds. For more information on FBAR requirements and how they affect cross-border individuals, read our article Are You Required to File FBAR? Cross Border Individuals Basic Information.
If you do not meet the Substantial Presence Test, you are generally considered a non-resident alien for tax purposes. As a non-resident alien, you are only subject to U.S. income tax on U.S.-sourced income and certain types of income connected with a U.S. trade or business.
However, if you wish to be treated as a resident alien, you may be able to make an election under certain conditions. It is advisable to consult with a tax professional or financial advisor to explore your options and ensure compliance with all applicable tax laws.
Tax laws always have exceptions. We aim to provide broad guidance in simple, understandable language. We recommend any reader consult with appropriate paid professionals to obtain tailored guidance after disclosing your facts and circumstances. Our blogs do not provide professional opinions to readers.