The substantial presence test is one of the two ways that the Internal Revenue Service determines whether an individual is considered a resident in the United States for tax purposes.
In the vast majority of cases, if you are a foreign national client who opened a US bank account for non-residents, it is highly unlikely that you pass the substantial presence test unless you spend considerable time in the United States.
In this article, we will share how to verify whether you meet this threshold or if you are considered a nonresident alien for tax purposes. If you are a nonresident, we will also discuss unique nonresident filing requirements you may need to consider, like those related to your ITIN application.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Substantial Presence Test
- How to Calculate Your US Presence?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
Substantial Presence Test
The Substantial Presence Test is one of the residency tests employed by the Internal Revenue Service (IRS) to determine the tax residency, tax filing requirements, and taxation of foreign nationals.
Importantly, foreign nationals’ taxation and filing requirements in the United States can be impacted by other U.S. taxation rules as well. This is especially true if you US sourced income, which may include certain US-based activities with high APY or you have Effectively Connected Income (ECI).
That said, certain individuals can also benefit from the presence of a tax treaty between the United States and their country of citizenship and residence. However, regardless of existing treaties, understanding the IRS’s substantial presence test and how it can impact your international taxation is important.
We will explain how to calculate days of presence in the United States (as outlined by the IRS) below. But first, it’s important to note that the substantial presence test specifically relates to nonresident aliens.
On the other hand, if you are a US citizen exploring foreign-earned income exclusions, you should search for information on the physical presence test.
Needless to say, regardless of who you are, tax compliance and abiding by U.S. tax law is important. So, if you believe that you may be liable for US taxes or have US filing obligations, you should speak with a qualified tax professional to ensure you are complying with U.S. taxation rules correctly.
How to Calculate Your US Presence?
The substantial presence test asks:
- Has the foreign national spent more than 31 days in the United States during the current calendar year?
- And, as the foreign national spent more than 183 days in the United States during the current calendar year and the two preceding years combined?
However, instead of calculating a basic total of all days spent within the United States in the current year and the preceding two years, the IRS wants you to follow a very specific formula, which is as follows.
Substantial Presence Test Calculation
Step 1. Days In the Current Calendar Year
Were you present for at least 31 days during the current calendar year? And, if so, count the total number of days spent in the United States during the current calendar year.
Step 2. Days In the Previous Calendar Year
One-third (1/3) of the total number of days spent in the United States during the previous year.
Step 3. Days In the Year Before the Previous Calendar Year
One-sixth (1/6) of the total number of days spent in the United States during the previous year.
How to Remain a Nonresident Alien According to Substantial Presence?
If your goal is to not qualify as a resident alien according to the substantial presence test, you should stay in the United States for no more than 120 days per calendar year. This would result in a total of 180 days (less than 183 days) according to the IRS’s own formula.
That said, there are a number of other considerations that can impact whether you are considered a resident for tax purposes and whether you have any specific tax filing requirements in the United States. So, if you believe that you may have tax liabilities or filing obligations, you should speak with a qualified tax professional to navigate your situation correctly.
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Frequently Asked Questions
Below are three of the most common questions we receive from people looking into what a substantial presence test is. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What is the Substantial Presence Test?
The Substantial Presence Test is a residency test. It is used by the Internal Revenue Service to determine whether foreign nationals are considered residents or nonresidents for tax purposes. Importantly, the Substantial Presence Test is one of two tests used by the IRS. The second test is called the green card test.
How Do I Know If I Am a Resident Alien?
You know if you are a resident alien if you have the legal right to remain in the United States as a green card holder (the green card test) or if you have exceeded more than 183 days in the United States over the preceding three years according to the formula used by the Internal Revenue Service (IRS).
What is An Example of a Substantial Presence Test?
An example of a substantial presence test (resulting in an individual that is considered resident for tax purposes) is a person who was physically present in the United States for 120 days of the current calendar year and 120 days of each of the two preceding years.
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