Part I of this blog post examined the importance of the Residency Starting Date (RSD) and how it applied under the Green Card Test. It also pointed out that traps for the unwary can destroy pre-immigration tax planning if one had not correctly nailed down the RSD. Today’s post will examine the RSD rules that apply when one is a resident under the “Substantial Presence Test”, when one is a resident under both the Green Card and Substantial Presence Tests as well as nuances in the rules for “exempt” individuals and under Treaty provisions.
Residency Starting Date under the “Substantial Presence Test”
First of all, what is the “Substantial Presence Test?” The Substantial Presence Test is a numerical calculation of the days of an individual’s physical presence in the US in order to determine if he is to be treated as a US tax “resident”. The Internal Revenue Service (IRS) can easily track one’s time spent in the United States, thanks to the Department of Homeland Security.
Counting Days of Physical Presence
The arrival and departure date records of nonimmigrant aliens entering and departing the United States are maintained in the U.S. Customs and Border Protection’s Nonimmigrant Information System, available on the I-94 website. You can access these records quite easily (and so can the IRS).
If you are a nonresident alien, NRA, for US income tax purposes, you should carefully monitor your days of physical presence in the US. You can now view the dates that you have entered and exited the US on the U.S. Customs and Border Protection I-94 website. When travelers visit the I-94 webpage they can retrieve their I-94 arrival/departure record number and five-year travel history by entering the required name, date of birth, and passport information. Just follow the simple steps to track your entrance to and exit from the USA
The criteria often cited for meeting the substantial presence test is being physically present in the US for more than 182 days in a given calendar year. This is very misleading, as the actual calculation used by the IRS is more complicated and looks at US residency over a three-year period. An individual has a “substantial presence” in the US for a particular calendar year (e.g., the “current” calendar year) if the sum of the following equals 183 days or more:
1) The number of days they were present in the US during the current calendar year;
2) One-third the number of days they were present in the US during the previous calendar year;
3) One-sixth the number of days they were present in the US during the second previous calendar year;
In addition, the individual must have spent at least 31 days in the United States in the current calendar year.
This means that a person who is physically present in the US for 121 days each year, for three consecutive years, would fall just short of the substantial presence criteria (calculation would be as follows: 121 days + 40.33 days + 20.16 days = 181.49 days). Any more than that means the individual risks being classified as a US person, or more specifically what is called a “resident alien”.
RSD if You Meet the Substantial Presence Test
So, what is your RSD under the Substantial Presence Test? If you meet this test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. Note, however, that if you were a US resident during any part of the preceding calendar year and you are a US resident for any part of the current year, you will be considered a US resident at the beginning of the current year. This “no lapse” rule was discussed in my earlier blog post.
RSD if You Meet Both the Green Card Test and the Substantial Presence Test
If you meet both the Green Card Test and the Substantial Presence Test in the same calendar year, your RSD date is the earliest of the two – thus, it is the earlier of:
- The first day you are present in the US during the year you meet the substantial presence test, or
- The first day you are present in the US as a Lawful Permanent Resident (green card holder).
Individuals must be very careful with this potential “Gotcha”. It can have an impact when the individual has been physically present in the US earlier in the same year (say, while searching for a home or a job) as the year he will obtain the green card and move permanently to the US.
For example, assume Mr. Al Fadr, a UAE national, first enters the US in December 2015 to look for employment. He remains in the US for two months through February 2016, during which time he finds a suitable job. He departs the US at the end of February and his US employer assists him in obtaining a green card. Mr. Al Fadr being a smart man, decides that while he is back in the UAE he will sell all of his stocks that have appreciated in value. He does this so that the gain will not be taxed to him once he becomes a US resident. Mr. Al Fadr’s green card comes through in June 2016 and he moves to the US on July 1 2016 to start his new life in America. Mr. Al Fadr will have met the “substantial presence test” for 2016. This is so because he will have 183 days or more of physical presence in 2016. He will also meet the green card test for 2016. When a taxpayer meets both tests (green card and substantial presence test), the RSD is the earliest of the two. Since Mr. Al Fadr’s first day of physical presence in the USA was January 1 2016, whatever US tax pre-immigration planning he undertook during 2016 (e.g., sale of appreciated stocks etc.) was done as a US tax subject. This means he will be taxed on the gains from his stock sales. Poor Mr. Al Fadr.He should have consulted with me beforehand!
Under a special rule, an alien individual may be present in the United States for up to 10 days without triggering the RSD for purposes of the substantial presence test. Specific rules and a special procedure must be followed. There could possibly be a way out if Mr. Al Fadr’s days of physical presence did not exceed 10, but sadly this was not the case here. Again, pre-immigration tax planning with the right advisor could have prevented Mr. Al Fadr’s sad tax result.
More Devil in the Details: “Exempt” Individuals, Treaty Rules Etc.
There are many nuances to the Residency Starting Date rules that go beyond the scope of today’s blog post. For example, an “exempt individual” under the substantial presence test is not considered to be “present in the United States” during the exempt individual’s period for purposes of determining his RSD under the Substantial Presence Test. This rule may result in situations in which the RSD for an “exempt individual” under the Substantial Presence Test is later than when the “exempt individual” arrived in the United States. For an example of this situation, see Example 2 in the IRS publication Alien Residency Examples.
Another example is that one’s RSD may differ from the normal tax rules pursuant to the terms of a Tax Treaty negotiated with the United States. In general, your RSD under the terms of a tax treaty is the date on which you first satisfy the definition of a “resident” under the terms of the treaty. As a general rule, each treaty looks first to the domestic tax law of each country to define residency for that country. If dual residency in two countries results, then most treaties contain what are called “tie-breaker” rules to determine which country’s rules can take precedence.
Overall, immigrants should remember that the US tax system is highly complex. It’s not worth it to go on the cheap for tax advice!
Posted July 11, 2019
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