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US Taxation - What Is Substantial Presence Test?
The substantial presence test is used to determine a nonresident alien’s tax liability in the United States. Substantial presence test under immigration laws is used to determine whether a foreign national is subject to U.S. income tax on their U.S.-source income.
Many foreigners always wonder if they should choose the US EB-5 Investor Visa or the US E-2 Treaty Investor Visa. The EB5 leads to a Green Card, whereas the E2 is a non-immigrant visa available to only a select number of nationalities. The distinction is often on the tax liability. Under the EB5, once you become a Green Card holder, you are liable to US taxation on your worldwide income. As an E2 treaty investor, you can be shielded from US worldwide taxation if you don’t trigger the substantial presence test.
If you meet the significant presence condition for the calendar year, you will be declared a U.S. resident for tax purposes. To pass this test, you must be physically present in the United States (US) for at least:
1) 31 days in the current year, and
2) 183 days in the 3-year period that includes the current year and the two years immediately before it, counting:
– all days you were present in the current year,
– 1/3 of the days you were present in the first year before the current year, and
– 1/6 of the days you were present in the second year before the current year.
In each of the years 2018, 2019, and 2020, you were physically present in the United States for 120 days. Count the complete 120 days of presence in 2020, 40 days in 2019 (1/3 of 120), and 20 days in 2018 (1/6 of 120) to see if you match the substantial presence threshold for 2020. You are not deemed a resident under the substantial presence test: for 2020 because your total for the 3-year period is 180 days.
Rules Regarding Days of Presence In The U.S.
On every day you are physically present in the United States, at any moment during the day, you are treated as if you are present in the country. There are, however, certain exceptions to this rule. For the substantial presence test, the following days of presence in the United States are not counted:
1) Days you commute to work in the United States from a domicile in Canada or Mexico, if you do so on a regular basis.
2) Days spent in the United States for fewer than 24 hours while travelling between two locations outside the United States.
3) Days spent in the United States as a member of a foreign vessel’s crew.
4) Days in which you are unable to depart the United States due to a medical problem that arises while you are in the country.
5) Number of days you are exempt (see below).
Publication 519, U.S. Tax Guide for Aliens, contains information on days excluded from the substantial presence test for non-exempt people.
The following areas are included in the term United States (US):
1) The District of Columbia and all 50 states.
2) The United States’ territorial waters.
3) The seabed and subsoil of underwater areas contiguous to US territorial seas and over which the US has exclusive rights to explore and utilize natural resources under international law.
U.S. territories and airspace are not included in this definition.
Exception To Substantial Presence Test: Who Is An Exempt Individual?
Counting days while you are an exempt individual is not allowed. The term “exempt individual” does not apply to someone who is exempt from paying taxes in the United States, but rather to someone who falls into one of the following categories:
1) A foreign government-related individual temporarily present in the United States on a “A” or “G” visa, excluding those with “A-3” or “G-5” class visas.
2) An instructor or trainee who is temporarily in the United States on a “J” or “Q” visa and who complies with the visa’s conditions.
3) A student who is temporarily in the United States on a “F,” “J,” “M,” or “Q” visa and who complies with the visa’s conditions.
4) A professional athlete visiting the United States for a philanthropic sporting event.
You must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return if you exclude days of presence in the United States for purposes of the substantial presence test because you were an exempt individual or were unable to leave the United States due to a medical condition or medical problem. If you do not have to submit an income tax return, mail Form 8843 by the due date for filing an income tax return to the address specified in the instructions for Form 8843.
If you don’t file Form 8843 on time, you won’t be able to deduct the days you were in the United States as an exempt individual or because of a medical condition that developed while you were there. This does not apply if you can demonstrate that you took reasonable steps to become aware of the filing obligations and significant steps to comply with those requirements by clear and persuasive evidence.
What Is Closer Connection Exception To The Substantial Presence Test?
Even if you pass the significant presence test requirement, you may still be considered a nonresident alien if you meet one of the exclusions listed below:
1) All aliens are eligible for the closer relationship exception. Please see Closer Connection Exemption from the Substantial Presence Test for more information.
2) The exception for a closer connection is only available to students. The Closer Connection Exception to the Substantial Presence Test for Foreign Students can be found here.