Foreign persons (not US citizens or Green card holders) or nonresident aliens (NRA), risk becoming subject to US tax on their worldwide income if they spend too much time in the United States of America and meet the substantial presence test. However, they may still be able to escape US tax on their worldwide income if they can meet the Closer Connection Exception.
In this short article we will summarize the substantial presence test, the closer connection exception to the substantial presence test and two examples.
The substantial presence test is met and an NRA will be considered a US resident for tax purposes if the person was physically present in the US on at least:
- 31 days during the current year, and;
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
The closer connection exception to the substantial presence test can be applied when a nonresident alien who is not a US citizen or a Green card holder meets the substantial presence test and still be treated as a nonresident alien by establishing a closer connection to a foreign country. The determining factors for establishing such a connection include, but not limited to the following:
The location of:
- Your permanent home,
- Your family,
- Your personal belongings, such as cars, furniture, clothing, and jewelry,
- Your current social, political, cultural, or religious affiliations,
- Your business activities (other than those that constitute your tax home),
- The jurisdiction in which you hold a driver’s license,
- The jurisdiction in which you vote, and
- Charitable organizations to which you contribute.
The above list is definitely not exhaustive and there are other factors to be considered such as foreign person’s intention to in the live in the United States permanently and actively taking steps to obtain one. In such a case closer connection exception test cannot be used to treat the foreign person as a nonresident alien.
Mark (a US citizen) and Susan (a Hong Kong citizen; Nonresident alien) is married couple. Mark is currently working with a US affiliate company in Hong Kong (HK) and Susan is self-employed. She owns and runs her own business in HK in cooperation with her other family members. Susan’s permanent home base is in HK and pay’s taxes on her self-employment to the HK tax authority.
Mark and Susan plan to visit their family in the US for an extended period of time. Susan is concerned that due to her extended stay she might be subject to the US tax on her self-employed income from HK.
However, if Susan can prove that she meets the closer connection exception, she might be able to avoid US tax on her world-wide income from HK.
An international student named John, who is not a US citizen or Green card holder is currently pursuing a doctoral program at a university in the US. The international student is a Dutch citizen and has no family members living in the US. John has a wife and two kids living in the Netherlands. Before starting the doctoral studies, John used to work in the Netherlands and paid taxes in the Netherlands.
John is in his 6th year of the program and is not considered an exempt individual anymore. This makes him potentially subject to taxation on worldwide income. He stayed in the US for just under 6 months in the 6th year.
John is a Dutch national with a permanent home and family in the Netherlands who spent less than 183 days in the US and he may be eligible to qualify and meet the closer connection exception to be treated as a nonresident alien and not be subject to US tax on worldwide income.
Conclusion: Taxpayers may be able to qualify for the closer connection exception to the substantial presence test, but it may be a difficult test to meet. Normally it would be a simpler option to prevent being subject to US tax by avoiding the substantial presence test.
Disclaimer: This information has been prepared for informational purposes only, and is not
intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this article was intended to be general in nature.
 Individuals on student visa are exempt from substantial presence test for a period of 5 years. Here is the link: https://www.irs.gov/individuals/international-taxpayers/exempt-individual-who-is-a-student
 Closer connection exception: https://www.irs.gov/individuals/international-taxpayers/closer-connection-exception-to-the-substantial-presence-test
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