Understanding the intricacies of the Substantial Presence Test and properly applying the exclusions is critical to properly determining U.S. tax residency status. In this article, we delve into the nuances of the Substantial Presence Test, including which days qualify, which days are excluded, the residency start date, and the closer connection exception that may apply even if you fall victim to the Substantial Presence Test.
The Substantial Presence Test is used to determine an individual's residency status in the United States based on their physical presence. It involves calculating the number of qualified days an individual spends in the U.S. over a three-year period. To meet the test's criteria, an individual must be physically present in the U.S. for at least:
- 31 qualified days during the current year,[1] and
- 183 qualified and weighted days over a three-year period, including the tax year under analysis and the two preceding tax years.
A “Qualified” Day
A qualified day is any non-excluded day, between Midnight and 11:59pm, in which you were physically present in the U.S. for a single second.
The first step is confirming you were actually in the U.S. The second step is determining whether that time should be excluded. If you were, in fact, in the U.S. and the time is not eligible to be excluded, then it is a Qualified Day.
Qualified Days in the tax year under analysis count as 1 full Qualified Day. Qualified Days in the preceding year count only as two-third of a Qualified Day. And Qualified Days in the year preceding the preceding year count only as one-third of a Qualified Day. Mathematically, being present in the U.S. for 92 days for 3 consecutive years would satisfy the test. The calculator below does the math for you.
Sovereign United States Soil
The term “United States” includes only the 50 States and the District of Columbia.[2] As such, time spent in U.S. possessions and territories, such as Native American lands, Puerto Rico, American Samoa, the Mariana Islands, and the U.S. Virgin Islands, are not counted.
However, a day in which you traveled from the United States to the U.S. Virgin Islands would count if you spent a single second on the soil of a U.S. state or the District of Columbia.
Excluded Days from the Substantial Presence Test
Certain days can be excluded from the Substantial Presence Test day calculation. Take note that no days are excluded for the Special Capital Gain Presence Test.
Exclusion Based on Location
To reiterate, tribal reservations are not part of the state in which they are located.[3] By implication, tribes are not treated as states within the definition of the “United States” in Section 7701(a)(9), which the IRS has recognized.[4] Therefore, any time spent on Native American territory is excluded, which includes casino resorts on Native American reservations.
Exclusion Based on Visa
Holders of the following visas are exempt from the Substantial Presence Test.[5] A - G - F - J - M – NATO – Q – Athletes in Charitable Event.
Foreign Government and International Organization Visas
Individuals with diplomatic status in general (diplomat passport), a visa for full-time diplomatic work, a full-time employee of an international organization, and immediate family members of the aforementioned. International organizations include NATO, which is based on substantial authority since the treaty was in effect before regulations went into effect.
Teachers for Two Years and Students for Five Years
Teachers on a J or Q Visas and students on a F, M, J, or Q visa can never qualify for residency during their visa period. However, teachers and trainees are only exempt for 2 years (4 years if paid by a foreign employer) and students are exempt for 5 years.[6]
Note: Beginning in 2016, the Science, Technology, Engineering & Mathematics Optional Training Program (STEM-OPT) is an extension of the F-1 Visa. It’s technically quasi-trainee but still legally considered an extension of the F-1 Student Visa. As such, the employer won’t realize it, but an employee on an F-1 Visa with an approved STEM-OPT plan will be exempt from FICA taxes.
Charity Athletes
Athletes temporarily in the U.S. to compete in a charitable sports event may exclude those days from the Substantial Presence Test.[7]
Commuters from Mexico and Canada
An individual who regularly commutes to work in the U.S. from a residence in Canada or Mexico is deemed not present on a commuting day when he returns within 24 hours to Canada or Mexico.
Flight Layovers and Short Stopovers
Flight layovers less than 24 hours in the U.S. do not count..
Medical Immobility and COVID
An individual unable to leave the U.S. because of a medical condition can disregard those days in which he or she was medically immobile. Technically, the medical condition must have “arose” in the U.S.
If you were diagnosed with, self-quarantined because of possible exposure to, or had your travel plans altered in any way as a result of anything associated with COVID and, as a result, incurred time in the U.S., that time does not count.
Compliance Reporting
Excluded days must be reported on IRS Form 8843.
Residency Start Date
The residency start date is crucial in determining when the Substantial Presence Test begins to apply to an individual. This date is usually the first day an individual is physically present in the U.S. for the tax year under analysis. Once the residency start date is established, the counting of days towards meeting the test's requirements begins.
Calculate the Substantial Presence Test
Based on all of the foregoing, enter your Qualified Days in our Substantial Presence Test Calculator below. If the result is that you satisfy the test, consider the Closer Connection Exception.
Closed Connection Exception
If the number of Qualified Days for the tax year under analysis is less than 183 days, you may be eligible to claim the Closer Connection Exception despite satisfying the Substantial Presence Test.
When this happens, a non-U.S. citizen can avoid a determination of residency if the individual was present less than 183 days in the current year and has a “closer connection” to a tax home in the foreign country.[8] There are five steps to determining eligibility to claim the Closer Connection Exception.
Step One: Less Than 183 Days for Tax Year Under Analysis
The individual must have been present in the U.S. for less than 183 Qualified Days.
Step Two: Tax Home in Foreign Country
The individual maintains, throughout the entire year, a tax home in a sovereign or independently governed foreign country, which includes U.S. possessions and territories. For intra-year moves, this could include two different tax homes. For a standard employed individual not engaged in a Sole Proprietorship or Partnership business activity, the tax home would be the person’s regular place of abode. For a self-employed individual engaged in a business activity, the tax home could include the individual’s principal place of business.
The term “regular place of abode” is defined in the context of Sections 911 and 937 as a total of 330 full days in any 12-month period. This interpretation is not legally binding in this context though as the phrase is undefined in this context.
Step Three: Domicile in Foreign Country
The individual’s facts and circumstances (e.g., permanent owned or rented house/apartment/furnished room, family, personal belongings, social/political/cultural/religious organizations, personal banking, business activities, driver’s license, voting, country of residence listed on documents, and types of official forms filed) must demonstrate a closer connection to a foreign country.
Step Four: No U.S. Immigration Documents Pending
The individual cannot have any pending immigration documents (e.g., Naturalization Forms i-130 (Petition for Alien Relative), i-140 (Petition for Prospective Immigrant Employee), i-485 (Application for Status as Permanent Resident), i-508 (Waiver of Immunities), DOL Form ETA-750 (Application for Alien Employment Certification), DOS Form OF-230 (Application for Immigrant Visa and Alien Registration).
Step Five: Filing of IRS Form 8840
And if the individual files IRS Form 8840, which is the official statement form for claiming the Closer Connection Exception, then said individual will not be treated as a U.S. tax resident despite satisfying the Substantial Presence Test.
Navigating the Substantial Presence Test with Castro & Co.
As you can see from this article, the Substantial Presence Test is far from simple. Seeking expert guidance is essential. Castro & Co. is an internationally renowned firm specializing in cross-border tax matters. With our deep expertise and commitment to delivering tailored solutions, we ensure that individuals make informed decisions to optimize their tax situation and comply with U.S. tax regulations.
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Bluebook Citation
The Substantial Presence Test, Int’l Tax Online Law Journal (August 10, 2023) url.
Legal Citations
[1] Treas. Reg. § 301.7701(b)-1(e)(Example 2-3).
[2] See IRC § 7701(a)(9).
[3] See White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980).
[4] See 1997 IRS NSAR 5006.
[5] See IRC § 7701(b)(5)(A).
[6] See IRC § 7701(b)(5)(E).
[7] See Treas. Reg. § 301.7701(b)-3(b)(5); IRC § 274(l )(1)(B).
[8] See IRC § 7701(b)(3)(B)(i)-(ii); also see Treas. Reg. § 301.7701(b)-2(a)(1)-(3).