Meeting Substantial Presence Test Means US Tax Compliance

Substantial Presence Test

Substantial Presence Test: Unless a U.S. Person is a Citizen or Legal Permanent Resident of the United States, chances are they do not have a tax return or foreign account and asset reporting requirement in the US. But, the IRS has a trick up its sleeve. If a foreign national is neither a Citizen nor a Green Card Holder but still meets the Substantial Presence Test, they may still have to report their foreign accounts, assets, investments, and income. This comes as a shock to many foreign nationals, who then realize they may be out of compliance for US tax and offshore reporting. And, with the IRS taking a very aggressive approach on matters involving unreported foreign income and foreign accounts compliance, it can be very scary. Let’s review the Substantial Presence Test.

How to Calculate the Substantial Presence Test

The Substantial Presence Test is a math calculation. Essentially, it boils down to counting days. Generally, only US Citizens and Lawful Permanent Residents are required to pay tax on “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.

IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:

• • • 1 day = 1 day in the current year

    • 1 day = 1/3 day in the prior year

    • 1 day = 1/6 day two years prior

Example A: If you were here 100 days in 2022, 30 days in 2021, and 120 days in 2020, the calculation is as follows:

• • • 2022 = 100 days

    • 2021 = 30 days/3= 10 days

    • 2020 = 120 days/6 = 20 days

      • Total = 130 days, so you would not qualify under the Substantial Presence Test and NOT be subject to US income tax on your worldwide income (and you will only pay tax on money earned while working in the US).

Example B: If you were here 180 days in 2022, 180 days in 2021, and 180 days in 2020, the calculation is as follows:

• • • 2022 = 180 days

    • 2021 = 180 days/3= 60 days

    • 2020 = 180 days/6 = 30 days

      • Total = 270 days, so you would qualify under the Substantial Presence Test and will be subject to US income tax on your worldwide income, unless another exception applies.

US Tax Liability

Once a person meets the Substantial Presence Test, they are required to report their worldwide income in the United States on Form 1040 instead of on Form 1040NR, as well as report FBAR & FATCA. 

Exceptions

There are some exceptions and exclusions to the Substantial Presence Test US tax filing rules — depending on the person’s purpose for being in the United States and what role/job they have in the United States — and whether or not they can qualify for the Closer Connection Exception to the Substantial Presence Test.

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