The “substantial presence” test often determines whether a nonimmigrant alien individual will be treated as a U.S. resident for federal tax purposes.  The test is objective and mechanical.  It provides that an alien individual is classified as a U.S. person for federal tax purposes if he or she is physically present in the United States for 183 or more days during a calendar year, after applying weighted formula across a three-year “lookback” period.  The formula prescribes the number of days of presence during each year of the lookback period that will be included in the overall total number of days.

While the substantial-presence rules are generally applicable, they do not override applicable tax treaty definitions of residency. And, if the individual is a dual-resident under the tax laws of both the U.S and a tax treaty country, the taxpayer may still be able to claim benefits under an income tax treaty.  For example, many U.S. tax treaties contain residency tie-breaker provisions that may render an individual a nonresident of the U.S. even though that individual meets the substantial presence test.

Our Freeman Law interactive treaty map provides a link to treaty materials for each U.S. tax treaty partner:

The Substantial Presence Test

A taxpayer is considered a United States resident for tax purposes if they satisfy the substantial presence test for that year.  As a threshold matter, a taxpayer must be physically present in the United States on at least:

• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the 2 years immediately before that

For these purposes, however, the test does not employ a one-for-one day count.  Rather, it includes all of the days of presence in the year being tested, 1/3 of the days of presence in the first year before the years being tested, and 1/6 of the days of presence in the second year before the year being tested.

Applying the Substantial Presence Test

The following example will help to illustrate the substantial-presence test.  Assume John was physically present in the U.S. on 120 days in each of the years 2019, 2020, and 2021. To determine if John met the substantial presence test for 2021, count all of the 120 days of presence in 2021, 40 days in 2020 (1/3 of 120), and 20 days in 2019 (1/6 of 120).

The total for the 3-year period is 180 days, so John is not considered a resident under the substantial presence test for 2021.

Days of Presence in the United States

A person is treated as present in the U.S.[1] on any day that they are physically present in the country at any time during the day. There are, however, exceptions.  For example, the following days do not count under the test:

• Days commuting to work in the U.S. from a residence in Canada or Mexico if the individual regularly commutes from Canada or Mexico.
• Days in the U.S. for less than 24 hours, when the individual is in transit between two places outside the United States.
• Days in the U.S. as a crew member of a foreign vessel.
• Days the individual is unable to leave the U.S. because of a medical condition that develops while in the United States.
• Days that the individual is an exempt individual.

Exempt Individuals

“Exempt individual” refers to someone who falls into one of the following categories:

• An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
• A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
• A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
• A professional athlete temporarily in the U.S. to compete in a charitable sports event.

An exempt individual must timely file a Form 8843, Statement for Exempt Individuals and Individuals.

Partial years

An individual may be a U.S. tax resident for a portion of a tax year and a nonresident for another portion of the same year. Typically, this occurs in the first or last year of U.S. residency.

Closer Connection Exception to the Substantial Presence Test

A taxpayer who satisfies the substantial presence test may still be treated as a nonresident for U.S. tax purposes if they satisfy the closer-connection exception.  The closer connection exception applies if the individual:

• was present in the U.S. for the year at issue for fewer than 183 days;
• had a tax home (as defined in IRC §911(d)(3)) in a foreign country; and
• maintained more significant contacts with a foreign country than with the U.S.

Other Elections

If an individual does not meet the substantial presence test, she may still be treated as a resident for U.S. tax purposes if she is a Lawful Permanent Resident (LPR) or made a first-year election under IRC § 7701(b)(4).

In addition, if an individual is a nonresident but is married to a U.S. citizen or resident, the individual may elect to be treated as a U.S. resident by making a joint election with his or her spouse.

Termination of Resident Status

An individual who is a U.S. resident due to the substantial presence test is treated as terminating their residency on the last day during the year that the individual was physically present in the U.S. if, the taxpayer satisfies the following two conditions for the remainder of the calendar year: (i) his or her tax home is in a foreign country and (ii) he or she maintained a closer connection to that foreign country than to the U.S.

The residency termination date may be different, however, for an individual who satisfies the substantial presence test and also was a lawful permanent resident.  Under such circumstances, the taxpayer’s residency termination date will be the later of the first day he or she is no longer and lawful permanent resident or the last day of physical presence in the U.S. if the taxpayer satisfies the two conditions above.

These rules are, however, subject to certain other rules.  For example, if the individual was a resident alien for any part of the year at issue and was a resident alien during any part of the following year (regardless of whether there was a closer connection to a foreign country), he or she will be treated as a resident of the U.S. through the end of the year at issue.

Expatriation Implications

Taxpayers who are treated as a U.S. resident, then later as a nonresident, then again as a U.S. resident, may have expatriation tax implications.  Such taxpayers may wish to obtain an analysis of the potential expatriation tax implications of their resident/non-resident status.

 

[1] The term United States (U.S.) includes the following areas: All 50 states and the District of Columbia; the territorial waters of the United States; the seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources.; the term does not include U.S. territories or U.S. airspace.

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