Exceptions to the Substantial Presence Test

Sep 12, 2014

Hi! In the post Overstayed Your Welcome? “Substantial Presence” in the USA & Foreign Teacher, Student, Trainee or Government Employee in the US? How to Prevent US Taxation on Your Worldwide Income, Virginia La Torre Jeker J.D. describes the substantial presence test and ways to excluded days from it – some think that you become a US person and have to pay tax on your worldwide income if you spend more than 183 days during the year in the USA, in reality the threshold is lower:

An individual has a “substantial presence test” in the US for a particular calendar year (e.g., the “current” calendar year) if the sum of the following equals 183 days or more:

1) The number of days they were present in the US during the current calendar year;

2) One-third the number of days they were present in the US during the previous calendar year;

3) One-sixth the number of days they were present in the US during the second previous calendar year;

One further detail to keep in mind is that under the regs (26 CFR 301.7701(b)-8 – Procedural rules), most have to file form 8843 on time in order to be able to pass the substantial presence test.

(d) Penalty for failure to file statement—
(1) General rule. If an individual is required to file a statement pursuant to paragraph (a)(1), (a)(2)(ii), (a)(2)(iii) or (a)(3) of this section and fails to file such statement on or before the date prescribed by paragraph (c) of this section, the individual will not be eligible for the closer connection exception described in § 301.7701(b)-2 and will be required to include all days of presence in the United States

Interestingly enough, (a)(2)(i) is not on the list above meaning that teachers and students can still exclude days on form 8843 even after the due date of their return has passed.

(a)(2)(iii) is on the list meaning that if you met too many days in the US because you were in a coma, you still have to timely file your form 8843 in order to exclude the days from the substantial presence test – does it make sense to anyone?

Also, once you have excluded the days, you can reduce them from the number shown on Schedule OI of your 1040NR.

For those who don’t fall in a category listed on form 8843, if you spent less than 183 days in the US, you can still use form 8840 to be treated as a non-resident provided you can show a closer connection to a foreign country.

If you are from a country with a treaty with the US, you can take a treaty position to be a non-resident but by doing so, you would still be subject to filing informational returns (FBAR, 8938, 5471, 3520…) if/when applicable.

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