Closer Connection Exception

Closer Connection Exception

Closer Connection Exception to the Substantial Presence Test.

Closer Connection Exception to the Substantial Presence Test: When a foreign person resides in United States, they risk becoming subject to US tax on their worldwide income as a “U.S. Person.” Generally, individuals who are subject to worldwide taxation as a U.S. Person are limited to U.S. citizens and Legal Permanent Residents. But, there is a third category of individual who may be subject to U.S. tax on their worldwide income, which are individuals who meet the IRS substantial presence test. Even if a person meets the substantial presence test, they may still escape U.S. tax on their worldwide income if they can show they meet the Closer Connection Exception to the Substantial Presence Test.

If a person meets the exception, they may be able to avoid us tax on the worldwide income and may also be able to sidestep international information reporting on form such a FBAR & FATCA.

Here are Five (5) important facts about the closer connection exception to substantial Presence:

Substantial Presences Requires 31-Days in the Current Year

Even if you were in the U.S. for a significant amount of time, the threshold to even be considered to meet the substantial presence test requires that the foreign national was in the U.S. for at least 31-days in the current year.

“You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and…”

Inapplicable to Legal Permanent Residents (Green Card Holders)

The closer connection rules do not apply to Legal Permanent Residents (Green Card Holder).

That is because permanent residents are subject to worldwide income tax and reporting rules whether or not they reside in the U.S. or abroad. 

If you are a Long-Term Resident, there are many pitfalls to be aware of, including accidentally triggering the expatriation alarm if you take a treaty position to be treated as a foreign resident.

Even if you Just Applied to be a Permanent Resident

Once you even just apply to be a Permanent Resident, you can no longer qualify for the closer connection exception.

This is because by apply for permanent residency, you are negating the fact that you have a “closer connection” with a foreign country(s).

“You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.”

Significant Contacts with a Foreign Country

The key ingredient to a successful closer connection submission is to prove strong ties with a foreign country. It is important to be able to show strong contacts with a foreign country(s).

“You will be considered to have a closer connection to a foreign country than to the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States.”

Substantial Presence Test 

Not everyone who meets the “counting days test” is considered to have met the substantial presence test.

As provided by the IRS:

Exempt Individual

Do not count days for which you are an exempt individual. The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories:

  • An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
  • teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
  • student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
  • professional athlete temporarily in the U.S. to compete in a charitable sports event.

If you exclude days of presence in the U.S. for purposes of the substantial presence test because you were an exempt individual or were unable to leave the U.S. because of a medical condition or medical problem, you must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return.

If you do not have to file an income tax return, send Form 8843 to the address indicated in the instructions for Form 8843 by the due date for filing an income tax return.

If you do not timely file Form 8843, you cannot exclude the days you were present in the U.S. as an exempt individual or because of a medical condition that arose while you were in the U.S.

This does not apply if you can show, by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.”

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