How to Legally Skip Worldwide Income Tax in the US by using an exception of the 183-day rule

Explore legitimate strategies to navigate the US's worldwide income tax system for global income earners.

The Substantial Presence Test (183-day rule) 

If you have been in the US for 183 days or more for the most recent three years, including the current year, the IRS thinks that you have sufficiently strong ties to the US and treats you as a US tax resident. This means that your worldwide income will be subject to the US taxes. 

Please take a look at my other article about this rule for more details. In essence, the rule is as follows:

1.  No. of days in Presence in the Current Yr+No. of days in the previous year/3 + No. of two years ago/6 = or more than 183 days    

and 

2. Your stay in the current year exceeds 31 days

The formula is relatively simple, and the IRS wants to add the weight to the time passage. In other words, the formula shows the IRS's interpretation of your closer connection to the US and your physical presence in the US. 

Exception to the Substantial Presence Test

The exception is called "tax-home exception." Even if you meet the substantial presence test, you can be a nonresident for US tax purposes. So, you'll be able to avoid worldwide income taxation. There are three conditions to meet:

(1) Present within the U.S. fewer than 183 days during the current year. 

(2) Establishes that, for the current year, your "tax home" is in a foreign country

(3) You have a closer connection to such a foreign country than to the U.S.  

Establishing Your Tax Home in a Foreign Country

A 'tax home' is generally considered to be the place of your regular or principal place of business.  If you can demonstrate that your economic ties are stronger to another country than to the US, you may claim that country as your tax home. The duration of such tax home must be more than the entire current year. 

To successfully establish a tax home in another country, you must show, for instance, that your presence there is not temporary or transitory. You should have significant residential ties, such as a house or an apartment where you live while working in that country, and you may also need to demonstrate that you pay taxes in that nation. 

Establishing a Closer Connection

You must be able to demonstrate a significant lifestyle connection to that country. This is the facts and circumstances test. The IRS reviews factors such as the location of the individual's permanent home, the location of the family, the location of personal belongings, the location of social, political, cultural, or religious organizations with which the individual has a current relationship, etc. 

Final Cautions

If you meet the three conditions, you can be a non-resident in the current year, and the IRS can only tax your U.S. income.

Please note that this tax home exception is not available for the year in which the individual applied for a green card or took significant steps to become a green card holder.