The substantial presence test indicates that a person is considered a resident of the United States for tax purposes if they meet the stay parameters in the country for at least:
- 31 days in the current year, +…
- 183 days during the 3-year period that includes: the current year and the 2 preceding years.
- During these 3 years, the following is counted:
- All days the person was present in the current year, +…
- 1/3 of the days they were present in the first year preceding the current year, +…
- 1/6 of the days the person was present in the second year preceding the current year.
If you still don’t fully understand, we’ll explain it with examples
Let’s say a foreigner was physically present in the United States for 90 days (3 months) in each of the consecutive years: 2023, 2022, 2021.
Let’s determine together if this person meets the substantial presence test or not.
- For the current year “2023,” you count the full 90 days they were present.
- For the previous year “2022,” you count 1/3 of the 90 days they were present. That is, 30 days.
- For the second year before “2021,” you count 1/6 of the 90 days they were present. That is, 15 days.
To meet the substantial presence test, you must add up to 183 days within the U.S. Let’s do the math:
90 days from 2023 + 30 days from 2022 + 15 days from 2021 equals: 135 days.
This means that they do not meet the test. Therefore, they do not have to file taxes.
Now let’s put another example of the substantial presence test.
Let’s imagine that another foreigner was physically present in the United States for 150 days (5 months) in each of the consecutive years: 2023, 2022, 2021.
- For the current year “2023,” you count the 150 days they were physically present in the country.
- For the previous year “2022,” you count 1/3 of the days they were physically present in the country. In total: 50 days.
- And for the second year before “2021,” you count 1/6 of the days they were physically present in the country. In total: 25 days.
If we add up these days, we would have a total of 225 days, which exceeds the 183 days of the test.
This means they meet the substantial presence test.
Beginning of U.S. Residency
Now that you know how to determine whether or not you meet the substantial presence test, you should also understand the following:
Individuals who meet the substantial presence test are considered resident aliens. Starting from the first day they enter the United States (after meeting the test), the days are counted as days of alien residency, excluding up to 10 days of prior minimus presence under 7701(b)(C)(ii).
It’s important to note that there are exceptions to this rule.
The following days of presence in the United States are not counted for the substantial presence test:
- Days when traveling to work in the U.S. from a residence in Canada or Mexico if traveling regularly to either of these countries.
- Days when in the U.S. as a crew member of a foreign vessel.
- Days when in the U.S. for less than 24 hours, while in transit between two places outside the USA.
- Days when unable to leave the U.S. due to a medical condition that develops while in the United States.
- Days when they are exempt individuals (I’ll provide more details on this concept later).
Which areas are included in the term “United States” for the substantial presence test?
It’s also important for you to know which areas of the United States are considered for the substantial presence test. These areas include:
- The 50 states of the U.S. and the District of Columbia.
- The territorial waters of the U.S.
- The seabed and subsoil of those submarine areas adjacent to the territorial waters of the United States, over which the country has exclusive rights under international law to explore and exploit natural resources.
What the term “United States” does not include are U.S. territories or U.S. airspace.
What qualifies as an “Exempt Individual”?
As mentioned earlier, days when you are an exempt individual are not counted.
It’s important to note that “exempt” doesn’t refer to being tax-exempt in the United States but rather includes individuals falling into the following categories:
- A teacher or trainee temporarily present in the U.S. with a “J” or “Q” visa, who substantially complies with the visa requirements.
- An individual who is temporarily present in the U.S. as a representative of a foreign government with an “A” or “G” visa (excluding individuals with “A-3” or “G-5” visas).
- A professional athlete temporarily in the United States to compete in a charitable sporting event.
- A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the visa requirements.
Finally, if you are excluding days of presence in the United States for the substantial presence test because you were an exempt individual or could not leave the country due to a medical condition, you must do the following:
- Include the Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, with your tax return.
- If you do not have to file a tax return, send Form 8843 to the address listed in the Form 8843 instructions before the due date for filing an income tax return.
- If you do not file Form 8843 on time, you cannot exclude the days you were present in the U.S. as an exempt individual or due to a medical condition. This does not apply if you can show, by clear and convincing evidence, that you took reasonable steps to meet the requirements for filing and the significant steps to comply with those requirements.
Now you understand how the substantial presence test works for foreigners in the U.S.
We are Rex Legal, and we want to assist, guide, or advise you in every process you need to create your business in the United States.
If you require our services, please contact us.