Caught in the US Tax Trap: PART II How Does a Non-US citizen Become a US “Resident” – Taxed on WORLDWIDE Income?

Last week’s blog post looked at one way that a non-US citizen can become subject to US income tax on his or her worldwide income – simply by getting a US green card.  Today’s post looks at the other way one can fall into the US tax trap.

“Substantial Presence” in the US

An individual who satisfies the “substantial presence” test is also taxed the same as a US citizen.  Again, as with the green card, the “residency starting date” (RSD) is an important concept (my blog post contains details).  The RSD marks the official date the individual is subject to the US income tax on worldwide income and becomes responsible for the myriad US tax information reporting forms.  For the non-US citizen, most likely he or she will have plenty of forms to file with regard to ownership of non-US assets.

Let’s have a closer look at the test.  The substantial presence test is met if the individual is either:

• physically present in the US for 183 days or more during the current calendar year, or,
• physically present in the US for 183 days or more during the tax year applying a weighted average test that looks back to days of presence in a 3 year “look back” period. Here’s a closer look at this weighted average test.

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 to meet this test.

A foreign individual 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 “resident alien”.  If you are uncertain of the number of days of your US physical presence, don’t worry, the US government likely has a record (that means the IRS can check it too).  You can check 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 .

There are many detailed rules in applying the “substantial presence” test. For example, an individual is considered to be ‘present’ in the US on any day he/she is physically present at any time during the day (thus, the arrival and departure days count as two full days assuming they occur on different days).

Certain days can be excluded under particular circumstances, such as having a medical condition arise while in the US or depending on the specific type of visa the person holds or the purpose for being in the US. Below follows some broad information, but beware relevant procedures must be followed to obtain the benefits of excluding days of presence under any of these exceptions. Please get the proper need tax help.  I am here to assist.

Medical Condition Exception / Visa Status/ Closer Connection Exception

Medical Problem

A foreign individual may exclude certain days of physical presence in the US under the so-called Medical Condition Exception (MCE).  This is a very nuanced exception and the devil is in the details. I provide a basic overview.

The MCE permits the alien individual to exclude days of physical presence if on those days the individual is unable to leave the US because of a medical condition that arose while the individual was present in the US. Note, the medical condition must arise in the US; it cannot be a condition for which the individual travels to the US for medical care or surgery.  Furthermore, the exception does not apply if the individual intended to leave the US immediately after the medical treatment or surgery, but couldn’t do so because of unforeseen complications from the treatment. See what I mean about details!

The individual claiming the MCE must file Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, to be eligible.  Depending on the number of days involved, meeting the exception may also require a signed statement from a physician or other medical official that the individual was unable to leave the United States due to a medical condition or medical problem.  If you are excluding up to a maximum of 30 days of presence because of a medical condition/ problem you generally do not need the physician’s signature.

Exempt Individuals

Days of physical presence do not count in certain cases for a so-called “exempt individual”. The term “exempt individual” depends on whether the individual falls within a special category, exempting him from counting days of physical presence in the US:

• An individual temporarily present in the United States as a foreign government-related individual;
• A teacher or trainee temporarily present in the United States under a “J ” or “Q ” visa, who substantially complies with the requirements of the visa;
• A student temporarily present in the United States under an “F, ” “J, ” “M, ” or “Q ” visa, who substantially complies with the requirements of the visa;
• A professional athlete temporarily in the United States to compete in a charitable sports event.

Closer Connection to a Foreign Country

Even if an individual meets the substantial presence test, it may still be possible to be treated as a nonresident alien if the individual meets all of the following requirements:

• Was present in the United States less than 183 days during the year, and
• Had a closer connection during the year to one foreign country in which the individual has a “tax home”, than to the United States (special rules apply if the individual has a closer connection to two foreign countries), and
• Maintained a “tax home” in that foreign country during the entire year, and
• Has not taken steps toward, and did not have an application pending for, lawful permanent resident status (getting a green card).

The individual must file Form 8840, Closer Connection Exception Statement for Aliens, to claim the Closer Connection Exception. This is attached to the taxpayer’s income tax return. If no federal income tax return is required, then Form 8840 must be sent to the Internal Revenue Service Center (indicated in the instructions attached to Form 8840) by the due date for filing the income tax return.

If Form 8840 is not timely filed, the individual cannot claim the closer connection exception to the substantial presence test, unless he or she can show by clear and convincing evidence that the individual took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements. This will not be an easy burden, so best bet is to timely file the Form 8840.

Be smart and avoid the tax trap!  I am here to assist.

Posted November 11, 2021