Substantial Presence Test – Determining Alien Tax Status

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The number of foreign nationals staying in the United States continues to increase every year. In fact, there are currently millions of people in the US who are from different parts of the world. Others are successfully granted a green card to have permanent residence and legally work in various states in the country. Generally, they can even qualify to be lawful US citizens after the span of 3 to 5 years. 

Moreover, there are also temporary residents who are staying in the country for different purposes. It may include people in business who look for company expansion, foreign government officials, students who pursue higher education, and other people who look for more opportunities for career growth. However, one of the challenges these foreign nationals will usually encounter is determining the status of residency for tax purposes. 

It’s because every foreign citizen has a responsibility to file an annual return with the help of the Internal Revenue Service. However, if you fail to do so, you’ll encounter various consequences, like failure-to-file or failure-to-pay penalty, and even the chance of losing your tax refund. That’s why you have to determine your residency status for tax purposes using the Substantial Presence Test so that you can deal with your tax obligation. Check out the full details below to know what the substantial presence test is, and how it will help you file and pay your return tax on time.

substantial presence test
Learn how the Substantial Presence Test affects your federal tax situation.

 What is the Substantial Presence Test?

If you’re a foreign national staying in the United States, you should know your legal responsibility for tax purposes. Because of that, the Internal Revenue Service or IRS will have to check your tax residency status through the use of the Substantial Presence Test. It’s a criterion to determine the status of an individual who is not a resident or a lawful permanent resident in the country. It’s to determine if an individual qualifies as a non-resident or resident for tax purposes.

Who Does Substantial Presence Apply to?

The IRS Substantial Presence Test applies to all foreign individuals staying in the United States and those people who haven’t been granted legal permanent residency yet in the country. Besides that, if the particular individuals don’t meet the requirements for the Form 8843 exemption or the Form 8840 closer connection test, this Substantial Presence Test is also meant for them. 

Hence, when those people satisfy the particular guidelines of the Substantial Presence Test, they now qualify to become residents for tax purposes mandated by the US government. On top of that, they are also required to report all of their existing assets, bank accounts, and even investments and businesses offshore. 

Exempt Individual

To calculate the Substantial Presence Test, you don’t have to include the number of days of your stay in the country when you were still an exempt individual. Being an exempt individual doesn’t mean an exemption from paying any income tax in the United States. It only means that a person is granted an exemption from counting the number of days of staying in the country to determine the residency status that satisfies the Substantial Presence Test. 

Moreover, you’ll be an exempt individual if you’re a professional athlete who temporarily stays in the United States to join any sports events that aim to raise funds for charitable purposes. Besides that, if you’re also an individual or have an immediate family member residing in the US currently working for an international organization for diplomatic purposes with a G or an A visa, you’ll also become an exempt individual. 

On the other hand, a student who has a physical presence in the United States with a Q, J, F, or M visa and those trainees or teachers with a Q, or J visa will also be exempt individuals. Hence, if you’re one of them, you need to process your income tax return with Form 8843. However, if you’re not required to process any income tax return, you have to send the form separately to the address stipulated on it. 

For any reason that you can’t process Form 8843 on time, you have to include the days you’ve stayed in the country during the time you were an exempt individual. However, if you can provide clear proof that you’ve tried to comply with these requirements on the stipulated schedule, this may not be applied to you. 

Days of Presence in the United States

For the U.S. Substantial Presence Test tax purposes, you have to count the number of days that you’re physically present in the U.S. However, there are particular days that you should exclude from counting. As discussed earlier, you don’t have to include the days when you were still an exempt individual. Besides that, if you were also a crew member of any foreign vessels, you also don’t need to count those days. In addition, if you frequently travel from Mexico or Canada to the U.S. for your job, or if you’ve only stayed in the country for a few hours or less than twenty-four hours, these days are also not included. 

Substantial Presence Test Calculation Example

Foreign individuals and those who don’t possess a US green card are subject to pay the required taxes from the income they’ve received from the companies they’re working for in the US. On the other hand, if you’ve successfully met the requirements to satisfy the SPT, you’ll then have the responsibility to pay taxes from the earnings you’re getting offshore. 

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The SPT calculation seems daunting at first, but learning it can potentially save a lot of tax.

Hence, take a look at this detailed example of an SPT calculation. Let’s say you have a physical presence in the United States for 50 days this year (2021), then you were there last year (2020) for 90 days, and another 120 days in 2019. So after that, you have to divide the 90 days last year by 3, so you’ll get 30, and divide the 120 days in 2019 by 6, and you’ll have 20. 

Now, you have to add these numbers, including your days of presence this year.  That’s 50 days plus 30 days, and another 20 days, making it a total of 100 days. Since it requires you to get at least 180 days, it means you didn’t qualify for the SPT and become a resident for tax purposes. Hence, you’ll only be paying for the required taxes from the income you’re earning while you’re still present in the United States. 

Let’s have another example. You’re currently present in the U.S. for five consecutive months now, and that’s a total of 150 days. Then, last year, you were there for eight months in total, and it’ll give you 240 days, and another five months in 2019 for 150 days. So you now have to do the quick math. Divide 240 days by 3, and you’ll get 80, and divide 150 days by 6, and you’ll have 25. 

After that, add the results to the number of days of presence you’re currently staying in the US, and you’ll have a total of 255 days. As mentioned earlier, you only have to get at least 180 days for the test. That means you qualify for the SPT, and you’re now subject to pay the required taxes mandated by the United States government, including what you’re earning offshore. 

Closer Connection Exception to the Substantial Presence Test

You can still avoid the resident alien SPT designation even if you’ve met the particular number of days of your physical presence in the U.S. in a three-year period. To do that, you only have to meet a particular set of requirements to qualify for the closer connection exceptions. It includes not applying for a green card or the legal permanent residency status in the U.S. Besides that, staying in the country for at least 183 days of presence or more in the current year and keeping good records of your tax home in that particular foreign country for the whole year will also help you qualify for closer connection exceptions.

In addition, if the Internal Revenue Service or you prove the fact that you’ve managed to keep important contacts with a particular foreign country, it shows that you’ve successfully built a stronger connection to that country than what you have with the United States. Hence, to gather pieces of evidence of the said connection, check the details below. 

  • The set of documents and forms you’ve submitted 
  • The country where you’ve filed these necessary documents and forms 
  • Your permanent address 
  • The location where your family is living in 
  • The jurisdiction in which you practice your suffrage, and you possess your driver’s license
  • Your affiliations in different organizations, programs, and even social, religious, or cultural involvement 
  • The location where you keep your valuables, like home appliances, vehicles, or pieces of jewelry 

However, there are a few reasons why you won’t be granted a closer connection exception. It’s when you’ll be proven that you’ve tried or taken steps to update your status to become a legal permanent resident in the United States. Besides that, it’s also when the IRS will check your records and find out that you have a pending green card application. These are the significant reasons why you may not claim your closer connection exception. 

On the other hand, if you didn’t do anything mentioned above, and you’ve proven and established a strong connection to a foreign country, you can go ahead and claim the closer connection exception. Then, you only have to process and file Form 8840. You can also attach it to the income tax return if you plan to process it as well. Then, you have to submit it to the IRS center on the deadline stipulated on the form. However, as previously mentioned, if you haven’t filed the said form on the schedule, you can’t claim your closer connection exception for the SPT unless you can prove that you’ve tried your best to submit those requirements on time. 

Non-Citizens & Green Card Holders

For tax status purposes, non residents are not officially and legally residents in the U.S. It could be because they didn’t meet the SPT requirements as stipulated in the IRS Publication 519, which is the U.S. Tax Guide for Aliens. It could also be that they were not granted a green card after application. On the other hand, the resident aliens are green card holders who have been granted the right to become legal residents in the U.S. after filing requirements and receiving approval for the application.

Moreover, those visa holders of O-1, TN, and H-1 remain as non-citizens of the country if they haven’t passed the SPT. Besides that, during the first two years of stay in the U.S., J professors and researchers are still non-citizens. The same thing goes for those who possess J and F student visa status within the first five years. 

Teachers and Trainees

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Teachers and students can be exempt from the substantial presence test

Those individuals who possess a Q or J visa and are temporarily present in the U.S. are included in the definition of teachers or trainees. It could be health specialists, interns, teachers, professors and research scholars, au pair, and many others. They can keep their visas and stay as long as they won’t violate US immigration laws. Otherwise, it’ll result in losing their visa status and, worse, they may be forced to leave the country. 

Moreover, if you were exempt as a trainee or teacher in three of the six years of your stay in the U.S. before the current year, you’ll be an exempt individual, especially if your employer has paid your compensation. That’s why you don’t need to count those days of presence for the SPT. All you need to do is to process and submit Form 8843 to the IRS center with your income tax return on the schedule stated on it. 

Exceptions to IRS Substantial Presence Test

Besides those exempt individuals discussed above, anyone may have a substantial presence exception for a particular reason. It’s when a person has a medical condition or severe health issues. Hence, if you’re suffering from a specific illness while you’re temporarily present in the United States, you must process and file the Statement for the Exempt Individuals and Individuals with a Medical Condition or Form 8843. You’ll then have to submit it to the IRS center on the stipulated deadline. 

Substantial Presence Test Calculator

Computing the days of presence you’ve stayed in the U.S. for the SPT can be daunting and confusing. However, you don’t have to worry about it now because you may find a website online with an SPT calculator. Then, you only have to key in the particular number of days each year, and you’ll then get the results if you qualify to become one of the residents for tax purposes in no time. On top of that, besides the online calculators online, there are also available apps that you can download for free. 

FAQs

What is the IRS substantial presence test?

What is substantial presence test? The answer is simple. The Internal Revenue Service needs to check the tax residency status of foreign nationals who are temporarily present in the United States. They use the SPT to calculate the number of days of presence when they were in the U.S. The result will then determine if you qualify to be a nonresident or resident alien for tax purposes. Hence, if you’re planning to move abroad, always make sure you’ve fully understood the effect of your physical presence on your tax responsibilities. 

How is the substantial presence test calculated?

It’s easy to calculate the number of days of your stay in the U.S. to determine if you qualify for the SPT. For example, if you’re staying in the country for 100 days in the current year (2021), you were there last year (2020) for 90 days, and in 2019, you also went there for 120 days. To do the computation, you have to divide 90 days by 3, and you’ll get 30, divide 120 days by 6, and have 20. Then, add the results to the number of days in the current year, making it a total of 150 days. However, the requirement you have to meet is at least 180 days, so it means you don’t qualify for the SPT. 

How do I know if I pass the substantial presence test?

One way to know if you pass the  Substantial Presence Test is when you meet the particular requirements. It includes reaching a specific number of eligible days of your stay in the U.S. in a three-year period using a Substantial Presence Test. Once you qualify for it, you have to submit the necessary documents and forms such as tax returns. 

What happens if you pass a substantial presence test?

After meeting the requirements for the SPT, you’re now subject to pay appropriate US taxes. After that, you have to fill out the form and submit other necessary documents. Besides that, you are also required to report all of your bank accounts, assets, and other business and investment offshore. Hence, moving forward, you won’t only be paying taxes from the income you receive while working in the U.S., but it also includes what you earn from your properties offshore. 

Does the substantial presence test apply to a U.S. citizen?

When foreign nationals qualify for the requirements of the Substantial Presence Test or the green card test, they’ll pay taxes the same way as natural-born residents in the U.S. That’s why the SPT is only for a resident alien for tax purposes who are currently present in the U.S., and it doesn’t apply for a natural-born U.S. citizen.

How do I know if I am a tax resident?

You will know if you are a tax resident in the U.S. when you have a legal permanent resident status in the country. You can do that by meeting the requirements for SPT or qualifying for the green card test. By then, you’ll be required to pay taxes not only from the income you’re getting while working in the United States, but you’re also taxed from your earnings in foreign countries. 

What is the Meaning of a Resident Alien?

The resident aliens are those who have qualified for at least one of the two tests, such as the green card test and the US Substantial Presence Test. These are the foreign nationals who are paying taxes worldwide. It means that they are paying taxes from what they earn in the U.S. and taxed from the income they receive offshore. 

What is a Non-Resident Alien?

Non-resident aliens are those who don’t have a legal residency or enough physical preference in the US. Besides that, they are those who haven’t qualified for the Substantial Presence Test and met the requirements to possess a green card. That’s why they are only paying the required taxes from the income they earn while working for the company in the country. 

What is the residency test for tax purposes?

The tax system in the United States will consider a foreign national as nonresident or resident for tax purposes. That’s why the Internal Revenue Service will use a U.S. tax residency test, also known as SPT, to check your residency or immigration status for you to understand how to proceed with your tax obligation. That’s a requirement for anyone who is temporarily present in the United States. 

Conclusion

If you’re staying in the U.S., one of the challenges you may face is when you file your tax return every year. However, with a little bit of research to know about the U.S. tax laws, you can check available options and understand every step you need to take. Always remember that you have to determine your residency status using the Substantial Presence Test. After that, you can now proceed with the rest of the process and comply with all of the requirements. 

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