Many non-Americans underestimate just how easily time spent in the United States can transform them into U.S. taxpayers. Under American tax law, you don’t need a U.S. passport or green card to face very significant U.S. tax obligations. Simply spending enough days on U.S. soil may result in being classified as a “resident alien.” That classification comes with full U.S. tax on worldwide income and reporting duties with respect to many foreign assets.
Substantial Presence Test: More Than Just “183 Days”
Most people assume the rule is simple: spend more than half the year (183 days) in the United States, and you become a tax resident. Too many individuals fall prey to this misconception, and the result can mean big tax troubles. In reality, the IRS applies a rolling, three-year formula known as the “substantial presence test.”
You will be treated as a U.S. tax resident for income tax purposes if the calculations under the formula result in a total of 183 days or more:
1. All the days you are present in the U.S. during the current calendar year;
2. Plus one-third of the days you were present in the immediately preceding calendar year;
3. Plus one-sixth of the days you were present in the second preceding calendar year.
Additionally, you must have spent at least 31 days in the U.S. during the current year.
This means even shorter annual stays can add up and result in tax resident status. As a general rule of thumb, a nonresident spending 121 days in the U.S. each year for three consecutive years would fall under the threshold (121 + 40.3 + 20.2 = 181.5 days). Anything more could tip the scale and trigger U.S. tax residency. IRS guidance is available.
What A Difference A “Day” Makes
For purposes of the substantial presence calculation, any part of a day spent in the United States generally counts as a full day, regardless of how short the visit may be. For example, arriving in the U.S. at 11:00 p.m. and leaving the next morning would count as two full days of presence. However, certain exceptions apply: days of commuting from Canada or Mexico, days spent as a crew member of a foreign vessel, time spent in the U.S. for less than 24 hours while in transit between two foreign destinations, and days exempt under a qualifying visa (such as student or teacher visas) may not count.
What Happens If You’re A Tax Resident
Once classified as a resident alien, your tax obligations mirror those of a U.S. citizen. This means various requirements must be met including filing a U.S. income tax return (Form 1040) and reporting all worldwide income (U.S. and foreign); understanding when filing Form 8938 (Statement of Specified Foreign Financial Assets) is required; potentially filing many other U.S. foreign information returns, e.g., reporting ownership in a non-U.S. corporation or partnership; facing an infinite statute of limitations if a U.S. foreign information return remains unfiled; and understanding and filing the FBAR (FinCEN Form 114) to report foreign financial accounts.
The penalties for noncompliance are severe. For example, failure to file the FBAR—even negligently—can cost $10,000 per unreported account, per year.
Key Exceptions To U.S. Tax Resident Status
Fortunately, the U.S. tax laws carve out some important exceptions. Meeting the substantial presence test doesn’t always mean you’re a tax resident responsible for U.S. tax on your worldwide income. Certain visa holders such as students (F, J, M, Q visas), teachers, and trainees may qualify as exempt individuals for a limited period, along with their dependents; foreign government employees and certain international organization staff may also qualify. A medical condition exception applies if an illness or medical issue arose while in the U.S. and prevents departure. It does not apply if you entered the U.S. for treatment of a pre-existing condition.
It will be important to learn about claiming the various exceptions by examining the requirement to file Form 8843 which is used to explain the basis of a claim that you can exclude days of physical presence in the United States for purposes of the substantial presence test.
The “Closer Connection” Exception
Even without falling into one of the categories above, there’s still a possible escape hatch. A noncitizen who meets the substantial presence test can avoid U.S. tax residency if they prove a “closer connection” to another country.
To qualify, various requirements must be met, including these significant mandates:
- You must have a “tax home” in another country during the entire year. This is a very nuanced concept and causes confusion for many people, so it is important to understand the meaning of a “tax home” for U.S. income tax purposes.
- You must spend less than 183 days in the U.S. during the current year.
- You must not have taken steps toward and did not have an application pending for obtaining lawful permanent resident status (a green card). The IRS makes clear that if you filed any of various listed immigration forms during or before the year in issue, the filing would indicate your intent to become a lawful permanent resident of the United States and that you are not eligible to claim the closer connection exception.
These forms are:
Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities
Form I-485, Application to Register Permanent Residence or Adjust Status
Form I-130, Petition for Alien Relative
Form I-140, Immigrant Petition for Alien Worker
Form ETA-750, Application for Alien Employment Certification
Form OF-230, Application for Immigrant Visa and Alien Registration
Closer Connection Factors
In claiming the closer connection exception, the IRS will examine a wide range of ties to the foreign country, comparing these to the ties maintained in the United States. The factors include the place where your family lives, where your permanent home is located (it is not relevant whether rented or owned, so long as that home is available to you at all times and not solely for brief stays), where your belongings are kept, the jurisdiction in which you hold a driver's license and in which you vote, and where your business interests lie. Successfully claiming the closer connection exception requires a timely filing of Form 8840, Closer Connection Statement for Aliens (generally by June 15 of the year following the relevant tax year).
Bottom Line
The U.S. tax system casts a wide net, and it’s surprisingly easy for non-Americans to get caught and become tax resident under the substantial presence test. Careful tracking of days, timely filings, and awareness of exceptions are essential for anyone spending extended time in the United States. Otherwise, what starts as a few extra months in New York or Los Angeles could result in a tax bill on your income from Paris, Singapore, or Dubai.
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NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE
This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.