One of the most important concepts in taxation is tax residency.
Individuals are be U.S. tax residents if they meet any of the following:
- They are a United States Citizen; or
- They are United States permanent residents (i.e., green card holders); or
- They meet the substantial presence test
A U.S. tax resident is require to report worldwide income on the U.S. tax returns. They are also subject to the FBAR filing requirement.
Determining whether you are U.S. citizen or green card holder is easy enough.
The substantial presence test is a little more involved.
The substantial presence test
An individual who meets the substantial presence test (SPT) for the calendar year is generally treated as a resident alien for U.S. income tax purposes.
Under the substantial presence test, an individual will be a U.S. resident for tax purposes if:
- The individual is present in the United States on at least 31 days during the current calendar year; and
- The sum of the number of days of U.S. presence during the current calendar year, plus one-third of the U.S. days during the first preceding calendar year, plus one-sixth of the U.S. days during the second preceding calendar year, equals or exceeds 183 days.
S was a citizen and resident of a foreign country who had never been to the United States prior to his arrival 08-15-2019 as a professor on an H-1b visa. He intends to remain in the United States for two academic years and does not intend to change his immigration status before returning home. Determine his residency starting date.
Date of entry into United States: 08-15-2019
Begin counting days on 08-15-2019
Number of nonexempt days in United States during 2019: 139 days (08-15-2019 through 12-31-2019)
Current year (2019) days in United States (139) × 1 = 139 days
Prior year (2018) days in United States (0) × 1/3 = 0 days
Year before that (2017) days in United States (0) × 1/6 = 0 days
Total = 139 days
S does not meet the substantial presence test during 2019. She is therefore considered a non-resident for tax purposes.
She would file a Form 1040-NR to report any U.S. source income, but need not report any foreign income.
Exceptions to presence days
There are a number of exceptions to the substantial presence test. If any of the following apply, then those presence days should not be included in your substantial presence test calculation.
Days as an exempt individual
Days as an exempt individual. An exempt individual is a:
- 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.
- Certain crewmembers of foreign vessels
W was a citizen and resident of a foreign country immediately prior to his entry into the United States. He is temporarily present in the United States as a graduate student at a university on an F-1 visa (student visa). He had never been in the United States before his arrival on 08-15-2015. Assuming W substantially complies with the requirements of his visa, does not change his immigration status, and remains in the United States throughout 2020, determine his residency starting date.
Date of entry into United States: 08-15-2015
Student F-1 visa
Exempt individual for 5 calendar years (2015 through 2019)
To determine whether W meets the substantial presence test (183 days), begin counting days on 01-01-2020.
Number of nonexempt days in United States during 2020: 366 days
Current year (2020) days in United States (366) × 1 = 366 days
Prior year (2019) days in United States (0) × 1/3 = 0 days
Year before that (2018) days in United States (0) × 1/6 = 0 days
Total = 366 days
W meets the substantial presence test on 07-01-2020 (the 183rd day of 2020). W’s residency starting date under IRC § 7701(b) is 01-01-2020 (the first day he was present in United States during the calendar year in which he met the substantial presence test).
Medical treatment exception
Days in the U.S. due to a medical condition that arose while in the U.S. should not be included in the SPT calculation.
If you exclude days of presence in the U.S. for purposes of the substantial presence test because you were an exempt individual or were unable to leave the U.S. because of a medical condition or medical problem, you must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return.
Days as a regular commuter from Canada or Mexico should not be included in the SPT calculation.
De minimis rule
An individual may be in the U.S. for up to 10 days without triggering his or her residency start date if the individual is able to establish that, during that period, his or her tax home was in a foreign country and he or she maintained a closer connection to that foreign country than to the U.S.
What is the residency start date?
If the individual was not a resident alien for any part of the preceding calendar year, the residency start date is the first day during the calendar year on which the individual was physically present in the U.S.
If the individual also met the lawful permanent resident (LPR) test for that year, however, the residency start date is the earlier of (1) the first day of presence in the U.S. under the SPT or (2) the first day the individual was physically present in the U.S. as an LPR.
What is residency termination date?
The residency termination date for a person meeting only the SPT is the last day during the year that the individual was physically present in the U.S. if, for the remainder of the calendar year, (1) his or her tax home was in a foreign country and (2) he or she maintained a closer connection to that foreign country than to the U.S.
The residency termination date for a person who satisfies the SPT and also was an LPR for the year in question will be the later of
- the first day he or she is no longer and LPR, or
- the last day of physical presence in the U.S.
if, for the remainder of the calendar year, (1) his or her tax home was in a foreign country and (2) he or she maintained a closer connection to that foreign country than to the U.S.
If the individual was a resident alien (met the SPT or was an LPR) for any part of the year under examination and was a resident alien during any part of the following year (regardless of whether there was a closer connection to a foreign country than to the U.S. in the year under examination), the individual will be taxable as a resident alien through the end of the year.