US tax residency of non-US individuals

Author: Michael Holland, Partner Blick Rothenberg

Many non-US individuals are unaware of the thresholds that determine if they are considered a US tax resident. Although you may not be a US citizen or green card holder, you may still trigger US tax residency under the substantial presence test (SPT) and therefore become a resident alien.

Special attention should be paid towards the SPT, as if you are determined to be a US tax resident you will be subject to the same tax rules as a US citizen or green card holder. This would ultimately result in the taxation of your worldwide income and potential international informational reporting requirements based on your circumstances and overseas asset base.

Substantial presence test

Under the SPT, an individual is a US tax resident if they meet the following criteria:

An individual is physically present in the US for at least:

1. 31 days during the current calendar year, and

2. 183 days during the three-year period covering the year in question and the two years prior, counting for:

a. all of the days you were present during the current calendar year

b. 1/3 of the days you were present in the first year prior to the current calendar year.

c. 1/6 of the days you were present in the second year prior to the current calendar year.

Therefore, if an individual is in the US for at least 183 days in a calendar year, they will automatically be considered US tax resident.

What constitutes a day of presence?

A day of presence is a fairly loose term. The Internal Revenue Service (IRS) determine a day of presence as: any day where an individual is physically present in the country, at any point during the day.

Surprisingly, the IRS also offer many exceptions to this rule where a number of different scenarios will not count as a day of presence when counting for the SPT. The more common exceptions to the rule are:

1. Days where you are in the US due to you being in transit between two locations outside of the US.

2. Days you are unable to leave the US due to a medical condition that has developed whilst in the US.

Closer connection exception

Inevitably there are many individuals who trigger US tax residency unintentionally. Luckily, these individuals may still be treated as non-US residents by virtue of the closer connection exception.

This exception allows individuals to be treated as a non-US resident if: they have a closer connection to a foreign country in which they have maintained a tax home for the entire calendar year, and have not taken any steps towards obtaining lawful permanent resident status in the US, such as an application for a green card. Moreover, the individual cannot have been present in the US for at least 183 days in the current calendar year alone. If, however, the individual is present in the US for at least 183 days in the current calendar year, they may still be able to be treated as non-resident of the US if they qualify as tax resident in a jurisdiction with which the US has a tax treaty. If that’s the case, the tie-breaker rules in that particular tax treaty will need to be scrutinised.

How we can help

Overall, there are many different scenarios that can result in an individual becoming a US tax resident. Subsequently, seeking professional US tax advice ahead of spending significant time in the US is paramount to avoid falling into any unnecessary bear traps.