Many people believe they only have to pay taxes to a foreign government if they are legal citizens or permanent residents, but this isn’t always the case. According to the IRS substantial presence test, workers without U.S. citizenship or permanent residency might have to pay taxes depending on how many days they have spent in the country over the past three years. You can work with a financial advisor who specializes in taxes to help you properly plan your finances and attempt to lower any potential tax liability.
What Is the IRS Substantial Presence Test for U.S. Residents?
The Internal Revenue Service (IRS) substantial presence test is the United States government’s standard for determining how much taxes you are to pay based on the last three years spent in the United States. The benchmark is 183 days spent in the United States. The rule is relevant for those living or working in the United States without U.S. citizenship or permanent residency status. The test calculates days spent in the United States with the following two criteria:
- Being physically in the United States for at least 31 days in the current year
- Being physically in the United States for 183 days or more, counting back from the past three years
However, the IRS counts each year differently. The current year has all its days counted. The year before has one-third of its days counted, and the year prior has one-sixth of its days counted.
If this formula shows you’ve been in the United States at least 183 days in the last three years, you have resident status specifically for taxes and will owe taxes to the IRS on all your income. This rule applies no matter the country in which you earned money. A result of fewer than 183 days means you are a nonresident for tax purposes and will owe the IRS for the income earned in the United States but not elsewhere. Remember, U.S. citizens and lawful permanent residents are exempt from this rule.
How to Determine an Individuals Tax Residency Status
The following factors will help you determine your tax residency status. Specifically, this list contains days that do not count toward the substantial presence test:
- If you commute to the U.S. for work at least 75% of the year from Canada or Mexico, where you hold the primary residence, these workdays are exempt from the substantial presence test
- Days in which you spent less than 24 hours in the United States while traveling from one foreign country to another
- If you visit the United States as a crew member of a foreign vessel
- If you have to spend time in the United States because you get sick while visiting and can’t leave
- If you’re from a foreign government on an A or G visa
- If you’re a teacher or intern with a J or Q visa
- If you’re a student with an F, J, M, or Q visa
- If you’re a professional athlete competing in a charity event
Tax Residency Examples
The substantial presence rule can be complex, and examples can help make it concrete. Let’s say you are a citizen and resident of a country other than the United States. Your profession is teaching. On January 1, 2019, you enter the U.S. for the first time to work as a teacher with a J-1 three-year visa. You follow the rules of your visa and don’t seek a change in your immigrant status.
Your J-1 visa exempts you from resident-type tax status until it expires on January 1, 2022. You have continued living in the United States without J-1 status. As of October 1, 2022, you sit down to determine your tax status based on your continued presence in the United States. You have been in the United States for over 31 days in 2022, so you move to the next step, calculating the following:
- Qualifying days of physical presence in the current year (2022): 273
- Qualifying days from last year (2021): 0 x 1/3 = 0
- Qualifying days from two years ago (2020): 0 x 1/6 = 0 days
- Total qualifying days: 273 + 0 + 0 = 273
273 qualifying days in the last three years means you are over the 183-day threshold and will owe the IRS taxes as a resident. Remember, you do not owe these taxes from 2021 or 2020, only the current year.
This next example is less straightforward. Let’s say you brought your spouse with you. Your spouse entered the United States through your J-1 visa on January 1, 2019. However, your spouse quickly shed their visa status and started the process to become a U.S. citizen on January 1, 2021. They also obtained the Employment Authorization Document needed to start working for a U.S.-based company on the same date. Your spouse became a lawful permanent resident of the U.S. on June 1, 2022. As of October 1, 2022, you would determine your spouse’s tax status for the current year this way:
- Your spouse spent more than 31 days in the United States in 2022.
- Qualifying days of physical presence in the current year (2022): 151 (the days after June 1 don’t count, as your spouse received lawful resident status).
- Qualifying days from last year (2021): 365 x 1/3 = 121
- Qualifying days from two years ago (2020): 0 x 1/6 = 0 (your spouse was still on your visa at that time, so these days don’t qualify).
- Total qualifying days: 151 + 121 + 0 = 272
272 qualifying days in the last three years means your spouse is over the 183-day threshold and will owe the IRS taxes as a resident. Remember, they do not owe these taxes from 2021 or 2020, only the current year.
What Happens When You Don’t Meet the IRS Substantial Presence Test?
If you don’t meet the IRS substantial presence test for the current year but know that you will stay over the 183-day limit next year, you have options for how the IRS handles your tax status. You can decide to take resident status for part of the current year and be a dual-status alien for the current year as well. To qualify for this possibility, you must be present in the U.S. at least 31 days in a row in the current year. Plus, you must be present in the U.S. for 75% or more of the remaining days of the year, counting the 31-day allotment. You can count up to 5 days out of the U.S. as days of presence.
However, if you’re not a U.S. citizen or a resident alien for any period of time, you hold nonresident alien status for that same duration. As such, you’ll file a Form 1040-NR for income earned while you held nonresident alien status.
U.S. Tax Treaties and Double Taxation
The United States’ tax treaties with other countries prevent you from paying more taxes than you owe. If you’re a U.S. citizen living in another country, your U.S. tax burden is reduced, even for money earned in the U.S. The laws in place keep double taxation from occurring. As a result, the bulk of your taxes might go to the country you take primary residence in, and your tax responsibility in the U.S. is minuscule.
The Bottom Line
The IRS substantial presence test helps the U.S. government decide how to tax your income. Your physical presence over the past three years determines your tax status. Specific conditions, such as routinely commuting from Canada or Mexico or holding a student visa, exempt you from the rule. However, it’s crucial to understand the rule if you don’t hold U.S. citizenship or permanent residency, as you might owe more taxes than you realize.
IRS Substantial Presence Test Tips
- Taxes are daunting no matter your citizenship status. Luckily, a financial advisor can help you clarify your tax status, deductions and more. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you live in a U.S. Territory, your tax situation can be challenging to decipher. Tax deductions can help you avoid double taxation. Learn more about qualifying for the Foreign Tax Credit.
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