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August 7, 2011 - Phil Hodgen

The substantial presence test explained

My quest is to make it easy for you to figure out the basic stuff. Send me the hard problems. 🙂

Here’s a basic one. It applies to individuals who are not citizens of the United States but they intend to spend time in the United States. How do they figure out whether the U.S. will treat them as a resident for income tax purposes?

This came about because today someone wants me to do an opinion letter (for real money) about whether a person is or is not a U.S. resident for income tax purposes. Not to get all jargon-y on you ‘n stuff but it has to do with the “substantial presence test.” (See how I planted a keyword phrase in there for El Goog?)

I said “Hey wait a minute, here’s how it works” and in the course of a few minutes she determined her own answer. Free. (Don’t weep bitter tears for me. There are plenty of harder problems that need solving. I keep myself busy.)

I’m going to do the same for you. Here is the quick explanation of the substantial presence test I gave her over the phone. I get the sense that doing it in writing will make it a bit easier to follow.

What you’re trying to figure out

Your question starts with “Am I going to be a resident of the United States for calendar year 2010?” (I’m using 2010 as an example; insert your favorite year if it pleases you).

Mathematics of the substantial presence test

The math is actually pretty easy. Here’s what you do:

  1. Count the number of days that you were in the United States in 2010. Write down that number.
  2. Count the number of days that you were in the United States in 2009. Divide by three. Write down that number, including the fraction if you have one.
  3. Count the number of days that you were in the United States in 2008. Divide by six. Write down that number, including the fraction if you have one.
  4. Add the three numbers you wrote down.
  5. If the sum of the three numbers is equal to or greater than 183, the substantial presence test says you will be treated as a U.S. resident for income tax purposes in 2010.

But what about the 183 day rule?

“But!” I hear you say. What about the 183 day rule? (This is the rule that says if you are in the USA for 183 days or more in a calendar year you’re a resident for income tax purposes).

“Hah!” I say, and “Hah!” again. You want to know if you’re a resident in 2010 and you were in the USA for 183 days in 2010? Plug 183 into my formula above, for 2010. What is the result? Yep. The sum of the three years is 183, so you’re a resident. Even if you spent no time at all in the USA in 2008 and 2009.

In other words, the 183 day rule is a subset of the advanced mathematics of the substantial presence test which looks at the three year window of time.

For extra credit

For extra credit in this exercise, assume you are in the United States for 122 days in each of 2008, 2009, and 2010. Run the math.

Then assume you are in the United States for 121 days in each of 2008, 2009, and 2010. Run the math.

Now you can answer your own question: “How many days can I stay in the United States, year after year, as a non-citizen of the United States, and never pay U.S. income tax as a resident?”

(Clue for the mathematically challenged: 121 days year in and year out, come to the USA on a tourist visa and have fun. You will never be taxed as a U.S. resident for income tax purposes under the substantial presence test.)

Special rules and exceptions

Yes of course there are special rules and exceptions. Start with the IRS web page on this topic if you need more information.

Nonresidents with US Activities