Exceptions to the IRS Substantial Presence Test
When a person is neither a US Citizen nor a Lawful Permanent Resident, then generally the Internal Revenue Service does not have the right to tax that individual on their worldwide income nor require them to disclose their global assets, accounts, and investments on various international information reporting forms such as FBAR and FATCA Form 8938. But, when a person is neither a citizen or permanent resident but stays in the United States for a sufficient number of days in order to qualify as a US person under the Substantial Presence Test — then the taxpayer is taxed on their worldwide income and required to report various international reporting forms to the IRS. Even if a taxpayer meets the requirements under the substantial presence test, there are still certain exceptions that may exist in order to negate the requirement that the taxpayer is considered a US person for tax purposes. Let’s take a brief look at some of the exceptions and exclusions to the substantial presence test.
31 Days in the Present Year
The first requirement is that the taxpayer must have remained in the United States for at least 31 days in the current year. Therefore, if the taxpayer is concerned about a potential foreign tax event in which they do not want to have to pay US tax as a US person — then they may consider not remaining in the United States for at least 31-days in the present year.
Residence by Regular Commute
The days that include commuting between the United States and either Canada or Mexico will not qualify towards SPT — as long as they are regular commuters. In other words, if you end up commuting from Canada for a sufficient number of days in the tax year to be considered a US person — but those are the only days they are in the United States –– those days would not qualify towards substantial presence.
Medical Condition Prevents Leaving the US
Likewise, if a person has a certain medical condition that requires them to remain in the United States and due to that medical condition the person is prevented from leaving the United States — and therefore become subject to substantial presence — those days do not count either.
Even if a person remains in the United States for a sufficient number of days to meet the substantial presence test if they are considered exempt then that type of individual not become subject to the substantial presence test even if they are in the United States for more than the required number of days. One common example is when a foreign person comes to the United States as an F-1 student for the first five years they are U.S. Residents.
Closer Connection Exception Test
If a person can show that they have a closer connection to one or more other countries, which usually involves having significant contacts with a foreign country or countries — then they can file a Form 8840 and make the claim that they meet the Closer Connection Exception to the Substantial Presence Test and not be required to report their worldwide income or disclose their overseas assets.
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