You can navigate the complexities of the Substantial Presence Test and protect your status from becoming a US tax resident unintentionally.
The Substantial Presence Test is a criterion the Internal Revenue Service (IRS) uses to determine an individual's tax residency status in the United States. It involves a formula that counts the number of days present in the U.S. over three years. To be considered a U.S. tax resident, one must be present for at least 31 days during the current year and 183 days during the three-year period that includes the current year and the two years immediately before that, counting all the days of presence in the current year, 1/3 of the days in the first preceding year, and 1/6 of the days in the second preceding year. Please take a look at the 31-day rule. Even if you meet the 183-day test, you must still meet the 31-day rule. You may not be a tax resident this way.
The author believes that this rule represents the IRS's attempt to link the number of days of your physical presence to your tax status as a resident. More days you spend in the US means a closer connection to the US.
Understanding this rule is crucial for those who travel to the U.S. frequently but intend to avoid becoming tax residents. It requires carefully calculating the number of days spent in the country to ensure that one does not inadvertently meet the substantial presence criteria.
The 183-day Rule is an essential component of the Substantial Presence Test. It states that if you meet the substantial presence threshold of 183 days, you will be considered a U.S. tax resident and subject to U.S. taxation on your worldwide income. This rule is calculated by adding the total count of days present in the U.S. during the current year to one-third of the days present in the previous year and one-sixth of the days present two years prior. It's important to understand that this rule can have significant tax implications for those who split their time between the U.S. and another country.
Becoming a U.S. tax resident affects your income tax and can also impact estate taxes and the requirement to report foreign bank and financial accounts. Therefore, it's imperative for international visitors and non-residents to accurately track their days in the U.S. to avoid the consequences of the 183-Day Rule.
Several exceptions to the Substantial Presence Test allow certain individuals to be in the U.S. without their days counting toward the substantial presence threshold. These exceptions include days present as a diplomat or consular official, days present on a student visa (F, J, M, or Q visa), days present as a professional athlete competing in a charitable sports event, and days when one is unable to leave the U.S. due to a medical condition that arose while in the country.
These exceptions do not apply automatically. Individuals must file the appropriate forms with the IRS to claim these exceptions. Failing to file correctly can result in days being counted and potentially pushing an individual over the substantial presence threshold.
The Closer Connection Exception or Tax Home Exception allows individuals who meet the Substantial Presence Test to avoid being classified as U.S. tax residents if they demonstrate a closer connection to a foreign country. To qualify for this exception, one must be present in the U.S. for fewer than 183 days in the current year, maintain a tax home in a foreign country during the year, and have a closer connection to that country than the U.S.
To claim this exception, one must file Form 8840 with the IRS, detailing the facts supporting a closer connection to a foreign country. This can include the location of family, personal belongings, social ties, and where one conducts routine personal business. The Closer Connection Exception is a valuable tool for non-residents who wish to spend significant time in the U.S. without becoming tax residents.
Accurate tracking of days spent in the U.S. is essential for non-residents to avoid unintentionally passing the Substantial Presence Test. Strategies for monitoring include maintaining a detailed calendar of travel, keeping travel receipts and boarding passes, and using digital tools or apps designed for tracking days for tax purposes.
It's also best to consult with a tax professional who can help interpret the rules, apply any relevant exceptions, and make sure that all required documentation is in order. Proactively managing one's presence in the U.S. is the key to preventing unwelcome tax surprises and maintaining one's desired residency status.