For individuals who are not US citizens or permanent residents, determining their US tax residency can be a complex process. The US tax code uses a variety of tests to determine an individual’s tax residency status, including the Substantial Presence Test (SPT). Understanding the SPT is crucial for non-US citizens or permanent residents who spend time in the United States and may have US tax liabilities.
What is the Substantial Presence Test?
The substantial presence test is used by the Internal Revenue Service (IRS) to determine if a non-resident alien or foreign national meets the criteria to be considered a resident for tax purposes in the United States. The IRS uses this test to determine if an individual is subject to U.S. federal income tax on their worldwide income, as well as other tax obligations, such as filing tax returns, reporting foreign bank accounts, and complying with U.S. tax laws.
The substantial presence test is based on the total number of days that an individual is physically present in the United States over a three-year period. If the individual meets the criteria for the test, they will be considered a resident for tax purposes and will be subject to U.S. tax on their worldwide income, regardless of whether the income is earned inside or outside the United States.
How is the Substantial Presence Test Calculated?
Under the substantial presence test, an individual will be considered a US resident for tax purposes if they were physically present in the United States for at least:
- 31 days during the current year, and
- 183 days during the current year and the two preceding years, calculated as follows:
- All the days present in the current year
- 1/3 of the days present in the first preceding year
- 1/6 of the days present in the second preceding year
If the total of this calculation equals or exceeds 183 days, the individual will be considered a US resident for tax purposes.
For example, if an individual was present in the United States for 100 days during the current year, 50 days during the first preceding year, and 25 days during the second preceding year, their total days of presence would be calculated as follows:
Current year: 100 days
First preceding year: 50 days ÷ 3 = 16.67 days
Second preceding year: 25 days ÷ 6 = 4.17 days
Total days of presence = 100 + 16.67 + 4.17 = 120.84 days
In this example, the individual would not meet the 183-day requirement for the SPT, and therefore would not be considered a US tax resident.
What are the exceptions to the Substantial Presence Test?
There are several exceptions to the Substantial Presence Test that may apply to certain individuals. These exceptions include:
- The Closer Connection Exception: This exception applies to individuals who have a “closer connection” to a foreign country than to the United States. To qualify for this exception, individuals must meet a series of requirements, including spending fewer than 183 days in the United States during the current year and having a tax home in a foreign country.
- The Exempt Individual Exception: Certain individuals, such as foreign government employees and teachers, may be exempt from counting days of presence in the United States for purposes of the Substantial Presence Test. This exception is outlined in Section 7701(b)(5) of the Internal Revenue Code.
- The Medical Condition Exception: This exception applies to individuals who are unable to leave the United States due to a medical condition. To qualify for this exception, individuals must provide documentation of their medical condition and the reason why they are unable to leave the country.
- Treaty benefits – Provisions in tax treaties between the US and other countries may provide alternative tests or exceptions. Treaty benefits can supersede the Substantial Presence Test.
If met, the Substantial Presence Test shall result in consideration as a U.S. resident for tax purposes and liability to U.S. income tax on worldwide income. This necessitates filing tax return each year with the IRS reporting all income regardless of source.
Meeting the Substantial Presence Test could also impact the ability to claim certain tax deductions and credits. For instance, non-residents typically cannot claim the standard deduction though some exceptions exist.
It is worth noting that meeting the Substantial Presence Test can have additional implications beyond tax obligations. For instance, being subject to U.S. immigration laws and potentially requiring a visa or green card to remain in the United States for an extended duration are potential outcomes of meeting the test.
It merits mention that that these exceptions can be complex, and the specific rules and exceptions that apply to a particular individual will depend on their particular circumstances. It’s always a good idea to consult with a tax professional or attorney if you have questions or concerns about your tax status.
