THE SUBSTANTIAL PRESENCE TEST: What You Need to Know

If you are a foreign national that is earning income in the US, you might find yourself overwhelmed when sorting through the jargon and complexities of the tax system. Filing taxes as a foreign national in the United States is a fairly complex process with many intricacies that you’ll need to understand in order to minimize errors. One of the most important determinants of your tax obligations is your residency status, which is assessed through the Substantial Presence Test. Getting a clear grasp of what this test is and how it affects you will be helpful as you move through the tax process. In this blog, we will explain the Substantial Presence Test and provide insights to help you understand how it impacts your US tax liabilities.

What is the Substantial Presence Test?

The Substantial Presence Test is a mechanism used by the Internal Revenue Service to determine whether foreign nationals are considered resident aliens for tax purposes. Being a resident alien means you are subject to US tax laws similarly to US citizens. The test is based on the number of days you have physically stayed in the United States over a three-year period, making it pretty straightforward for most.

How the Test Works

To calculate your presence in the United States, you should add up:

• All the days you were physically present in the US in the current tax year.
• One-third of the days you were present in the US in the previous tax year.
• One-sixth of the days you were present in the US in the year before the previous tax year.

If the total exceeds 183 days, you meet the Substantial Presence Test, and you are considered a resident alien for tax purposes. This means you will be subject to the same tax obligations as US citizens, including reporting your worldwide income to the IRS.

Exceptions and Considerations

Exempt Days: Some days spent in the US do not count towards the test, such as those for individuals in transit or for medical treatment.

Students and Exchange Visitors: Foreign students on F, J, M, or Q visas and exchange visitors on J visas have an entirely different set of rules. They might not be classified as resident aliens for tax purposes, even if they meet the Substantial Presence Test.

Closer Connection Exception: If you have a “closer connection” to a foreign country and meet certain criteria, you could be eligible to claim an exemption from being treated as a US tax resident.

What Happens If You Pass the Test?

The SPT is not a test that can necessarily be passed or failed, you simply meet the requirements or you don’t. If you meet the Substantial Presence Test and are considered a resident alien, you will be required to report your worldwide income to the IRS. This includes income earned both inside and outside the United States. Additionally, you will need to file your US taxes using the appropriate tax forms for resident aliens, such as Form 1040.

What If You Don’t?

If you don’t meet the Substantial Presence Test, you are going to be classified as a non-resident alien. Non-resident aliens are generally only taxed on income from US sources and they use Form 1040-NR to file a U.S. income tax return.

Final Thoughts

Foreign nationals residing in the United States need to understand the Substantial Presence Test as it determines your tax residency status, impacting the income you must report and the tax forms you need to file. Keep in mind that there are exceptions and exemptions available, so we recommend consulting with a tax professional to ensure you meet your tax obligations correctly.