Do you often travel to the U.S. for work or other reasons? If so, it’s crucial to know your U.S. tax residency status. For non-U.S. citizens, your residency status significantly influences your tax obligations. Understanding the substantial presence test rules can help you steer clear of any unwelcome surprises.
What Does It Mean to Be a Tax Resident in the U.S.?
When a person qualifies as a U.S. tax resident, he is taxed based on his worldwide income. This means he should report all income earned both inside and outside the U.S. to the Internal Revenue Service (“IRS”).
How Is Tax Residency Determined?
There are two primary criteria for determining tax residency in the U.S.:
If you meet either of these criteria, you qualify as a resident for U.S. income tax purposes. If you don’t, you’re classified as non-resident for tax purposes.
This article will focus on explaining the Substantial Presence Test, its criteria, and its implications for taxpayers.
What is the Substantial Presence Test?
The Substantial Presence Test is a test employed by the IRS (under 26 USC §7701(b)(7)(A)) to decide whether someone should be treated as a U.S. tax resident. If you spend a certain amount of time in the U.S., you may create a U.S. residency for tax purposes.
For example, if a foreign consultant regularly visits the U.S. to work with tech companies in Silicon Valley, he could become a U.S. tax resident if his time in the U.S. surpasses the threshold set by the IRS. This would require him to pay taxes on his entire global income, not just his earnings in the U.S.
Understanding the Substantial Presence Test Criteria
According to 26 USC §7701(b)(3), you may qualify as a U.S. tax resident under the Substantial Presence Test when:
- You are physically present in the U.S. for at least 31 days during the current year, and
- The sum of the following equals or exceeds 183 days:
- All days present for the current year, plus
- 1/3 of the days present for the first preceding year, plus
- 1/6 of the days present for the second preceding year.
How It Works
The test requires you to spend at least 31 days in the U.S. for the current year and a total of 183 days over the past three years,
Consider this scenario:
You visited the U.S. for a certain period over the last few years until 2025. Your days will be calculated as follows:
- Current year (2025): You were present in the U.S. for 35 days in 2025, so all your 35 days will be counted.
- Prior year (2024): You spent 90 days in the U.S. in 2024. Only one-third of those 90 days will be counted, which amounts to 30 days.
- Two years ago (2023): You spent 60 days in the U.S. in 2023. Only one-sixth of 60 days will be counted, which amounts to 10 days.
If the total calculated days are 183 or more, you pass the substantial presence test and are considered a U.S. tax resident.
In the above example, you were in the U.S. for 35 days during the current year, 30 days in the previous year, and 10 days in the year before that. Thus, your total number of days will be 75, which is less than the required 183 days. You will therefore not be treated as a U.S. resident for tax purposes.
Example Scenarios:
Scenario 1: If you were in the U.S. for 80 days in 2022, 30 days in 2021, and 120 days in 2020, your total would be:
2022 = 80 days
2021 = 30 days ÷ 3 = 10 days
2020 = 120 days ÷ 6 = 20 days
Total = 110 days, so you would not qualify under the Substantial Presence Test in 2022 and are considered as a non-U.S. tax resident.
Scenario 2: If you spent 180 days in the U.S. each year for 2022, 2021, and 2020, the calculation would be:
2022 = 180 days
2021 = 180 days ÷ 3 = 60 days
2020 = 180 days ÷ 6 = 30 days
Total = 270 days
Total = 270 days, so you would qualify under the Substantial Presence Test in 2022 and be considered a U.S. tax resident unless another exception applies.
Scenario 3: Sarah lives and works in Dubai, earning her income entirely outside of the United States. She frequently visits the U.S. to spend time with her fiancé, who is a U.S. citizen.
Let’s assume she spent 180 days in the U.S. each year in 2019, 2020, and 2021. For the 2021 test, she would count all 180 days in 2021, 60 days from 2020 (⅓ of 180), and 30 days from 2019 (⅙ of 180). Her total is 270 days, making her a U.S. tax resident for 2021.
As a U.S. tax resident, Sarah is required to report all income earned worldwide, including her UAE income, on her U.S. tax return (Form 1040). This could potentially lead to taxation of her UAE income in the U.S. —an unintended tax consequence, as she has no U.S.-source income but still faces U.S. taxation.
Example Scenarios:
Scenario 1: If you were in the U.S. for 80 days in 2022, 30 days in 2021, and 120 days in 2020, your total would be:
2022 = 80 days
2021 = 30 days ÷ 3 = 10 days
2020 = 120 days ÷ 6 = 20 days
Total = 110 days, so you would not qualify under the Substantial Presence Test in 2022 and are considered as a non-U.S. tax resident.
Scenario 2: If you spent 180 days in the U.S. each year for 2022, 2021, and 2020, the calculation would be:
2022 = 180 days
2021 = 180 days ÷ 3 = 60 days
2020 = 180 days ÷ 6 = 30 days
Total = 270 days
Total = 270 days, so you would qualify under the Substantial Presence Test in 2022 and be considered a U.S. tax resident unless another exception applies.
Scenario 3: Sarah lives and works in Dubai, earning her income entirely outside of the United States. She frequently visits the U.S. to spend time with her fiancé, who is a U.S. citizen.
Let’s assume she spent 180 days in the U.S. each year in 2019, 2020, and 2021. For the 2021 test, she would count all 180 days in 2021, 60 days from 2020 (⅓ of 180), and 30 days from 2019 (⅙ of 180). Her total is 270 days, making her a U.S. tax resident for 2021.
As a U.S. tax resident, Sarah is required to report all income earned worldwide, including her UAE income, on her U.S. tax return (Form 1040). This could potentially lead to taxation of her UAE income in the U.S. —an unintended tax consequence, as she has no U.S.-source income but still faces U.S. taxation.
Exceptions to the Substantial Presence Test
Even if you qualify as a U.S. resident under the Substantial Presence Test, you may still be treated as a non-resident if you qualify for certain exceptions. Let’s understand some of them, which are as follows:
- Closer Connection Exception: If you were in the U.S. for fewer than 183 days during the year, you may not be classified as a U.S. resident. This applies if you had a closer connection to a foreign country where your tax home was located. See 26 CFR § 301.7701(b)-2
Example:
Maria, a non-U.S. citizen, spends 120 days in the U.S. each year for business. Her primary residence and family are in Spain. Maria does not have a green card or any intent to move to the U.S. Here, she has a stronger connection to Spain as her family, permanent home, and financial interests are all there. In that case, the IRS would recognize her closer connection to Spain, rather than the U.S., exempting her from being classified as a U.S. tax resident.
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.
To claim this exception, file Form 8840: Closer Connection Exception Statement for Aliens with the IRS, explaining your closer connection to a foreign country.
Tax Treaty Exception: If you’re a resident of a country that has a tax treaty with the U.S. and meets the residency criteria of both countries, you can choose to be treated as a non-U.S. tax resident. This can be achieved by utilizing the “tie-breaker” rule under the treaty.
See IRC §7701(b)(6) and Treas. Reg. §301.7701(b)-7
Example: John is a dual resident of the U.S. and Germany but has his family and main residence in Germany. Under the tax treaty’s tie-breaker rule, he can be considered a tax resident of only one country and avoid double taxation.
Under the tie-breaker rules of the U.S.-Germany tax treaty John would be considered a tax resident of Germany because his permanent home and the majority of his personal and economic ties—his “center of vital interests”—are in Germany. This determination would help avoid double taxation on his income.
- Exempt Individuals under the Substantial Presence Test
You may be considered an exempt individual if you fall under the following categories:
- You’re temporarily in the U.S. as a government official (under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.) (26 USC §7701(b)(5)(B)).
- You’re temporarily in the U.S. as a teacher (under a “J” or “Q” visa), (26 USC §7701(b)(5)(C).
- You’re temporarily in the U.S. as a student (under an “F,” “J,” “M,” or “Q” visa) (26 USC §7701(b)(5)(D).
- You’re temporarily in the U.S. as a professional athlete to participate in a charitable sports event (26 USC §7701(b)(5)(A)(iv)).
Generally, you should not count days in which you are considered an exempt individual for the purpose of the substantial presence test.
If you fall under any of the above exempt categories, you should file Form 8843 to claim this exemption.
When Not to Count Days in the U.S. for the Substantial Presence Test
You should not include the following days when calculating your days of substantial presence test, as per (26 USC §§7701(b)(7)(B) and 7701(b)(7)(C)):
- You commute from Canada or Mexico to work in the United States.
- You are in transit in the U.S. for less than 24 hours (usually when you are in transit between two countries outside the U.S.)
- You are a crew member of a foreign vessel.
- You are incapable to leave due to a medical condition that arose in the U.S.(26 USC §7701(b)(3)(D)(ii)
- You qualify as an “exempt individual”, as detailed in the above section.
U.S. Tax Obligations if You Meet the Substantial Presence Test
If you qualify under the Substantial Presence Test, you are required to report your worldwide income on Form 1040 . You may also be required to comply with FBAR and FATCA reporting.
Strategic Planning to Avoid Meeting the Substantial Presence Test
If you intend to stay in the U.S. without establishing tax residency, consider these strategies:
- Track Your Days in the U.S.: Keep an accurate record of your time spent in the U.S. to avoid unintentional residency.
- Limit Your U.S. Visits: Minimize your U.S. travel. Plan trips strategically and use videoconferencing where possible.
- Check for Exemptions: Be aware of exceptions that might apply to your situation. Consider filing the appropriate forms if you qualify for exemptions.
- Consult a Tax Expert: A professional can help you plan your travel and understand exceptions to the Substantial Presence Test.
Conclusion
Understanding the Substantial Presence Test is crucial for anyone who spends significant time in the United States. This IRS test determines whether non-U.S. citizens are considered tax residents, potentially subjecting their worldwide income to U.S. taxation.
To avoid unexpected tax consequences, consult a qualified tax professional to devise a strategy that aligns with your travel needs while optimizing your tax position. Contact Arora Law P.C. today for a comprehensive tax consultation and ensure you comply with the latest U.S. tax residency rules.
Disclaimer: The information provided in this article is for general informational purposes only and does not include legal advice. This article does not comprise an attorney-client relationship between the reader and Arora Law P.C. or its attorneys. If you have specific questions regarding your individual situation, please consult with a licensed attorney.
The information in this article is current as of the publication date. U.S. Tax laws and regulations change frequently, and readers should confirm whether any updates have occurred since.