Ep 04: To Be or Not to Be – Not Just a Question for Hamlet (Substantial Presence Test)
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In this episode of the International Money Café Podcast your co-hosts Jane Mepham CFP® and Manasa Nadig, EA explain exactly what you need to do to be considered a U.S. tax resident.
If you are a U.S. citizen or a green card holder (permanent resident), by default, you are a U.S. tax resident. If you don’t meet one of those conditions, the IRS has a cool test called the Substantial Presence Test (SBT) that determines how you should be treated for tax purposes.
The test consists of counting the days you have lived in the U.S. over a certain period.
Listen in as Manasa explains the test, including examples, to learn what the Substantial Presence Test is, how it’s used to determine your tax residency, and why it's so important.
The views and opinions are those of the speakers, and should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Jane Mepham, CFP (00:00.866)
Hello everyone. Welcome to another episode of the International Money Cafe Podcast. I'm your host, Jane Mi from Certified Financial Planner.
Manasa Nadig (00:12.854)
I'm your host, Manasa Nade, Enrolled Agent.
Jane Mepham, CFP (00:16.894)
In today's episode, we're going to address one of the questions that we see come across so that people ask us once they learn about this subject. So we're going to be talking about what's called the Substantial Presence Test, SPT. If you're not a US citizen or green card holder in the US, your residency, and by this I mean your tax residency, is determined by your substantial presence in the country.
So in today's episode, we're going to talk about what is a substantial presence test. What are the elections that you can make to claim or not to claim tax residency? Who's a tax resident of the U S and who is exempt from counting days for tax purposes. So what I'm going to do, because Manasa is a tax person in this show.
I'm going to pass it on to her. So Manasa, would you like to maybe just start by answering the question, why is SPT important?
Manasa Nadig (01:21.24)
Definitely. SPT is important because it determines your tax residency, which means that it determines how you'll file your taxes if you are a non-immigrant visa holder. So if we dig deeper into the official meaning of the Substantial Presence Test, we see that we can understand it better
if we look at what it is not rather than what it is. So let me explain that. If you are considered to be a non-resident, you, I'm sorry, let me do that again. You are considered to be a non-resident of the United States for US tax purposes unless you meet one of two tests. One is the green card test.
U.S. for federal tax purposes if you are a lawful permanent resident of the United States at any time during the calendar year. So this is known as the Green Card Test. If you are in the United States already on a visa and then converted over to a Green Card, you are considered to have had tax residency through the year. But if you were not in
the United States and you got your green card. So then you met your green card test at any time during the year, but did not meet the SPT. Your residency start date is the first day you're present in the U.S. as a green card holder.
Jane Mepham, CFP (03:10.602)
So wait a minute, so does it matter when you become a green card holder? Let's see if you become a green card holder in December versus in January. Does it matter?
Manasa Nadig (03:23.232)
Yeah, actually you can be both a resident and a non-resident in the same year for US tax purposes. So this usually happens in the year you first arrive in the US or in the year in which you depart the US. You will file a dual status tax return for that year. There are a lot of planning opportunities there.
You continue to qualify for residency under this test unless you voluntarily renounce your green card in writing with the USCIS or your green card is terminated by the USCIS or is terminated judicially by a US federal.
So let's go back to defining what a substantial presence test is. So a substantial presence test is based on a calendar year, which is January 1 to December 31. So you'll be considered a United States resident for tax purposes if you meet the SPT, or the Substantial Presence Test, for the calendar year. And to meet this test, you must be
physically present in the United States on at least, and I'll slow down here, one, 31 days during the current year and 183 days during the three-year period that includes the current year and the two years immediately before that, counting all the days you are present in the current year.
and one third of the days you were present in the first year before the current year and one sixth of the days you were present in the second year before the current year.
Jane Mepham, CFP (05:19.65)
Okay, so would it help if we went through maybe a small case study to kind of make this concrete?
Manasa Nadig (05:28.696)
Absolutely. I definitely think we need a case study here. So let's say Mike arrived in the United States so and he was he arrived in the United States in 2019 and he continued to stay in the United States in 2019 2020 and 2021 So
Jane Mepham, CFP (05:31.79)
Thanks for watching!
Manasa Nadig (05:52.656)
Let's say his stay in the United States was intermittent. He was traveling in and out of the United States back to his home country and so on during these three years. So do, but in 2021, we now need to determine his tax residency. So to determine if you met or if Mike met the
Manasa Nadig (06:20.64)
And let's say he was there in the country 120 days in each of these three years to keep matters simple in 2019, 2020 and 21. So then to meet the substantial presence test in 21, we count all of the days in 21, which is 120. We count 40 days in 2020, which is one third of 120.
and 20 days in 2019, which is 1 sixth of 120. And now if you look at the total for the three year period, which is 180 days, you're not or Mike is not considered a resident under the substantial presence test for 2021. So let's say he had some income from the US sources during this period, he would still file a US tax return.
but it would be a 1040NR, which is a non-residence tax return. But that is kind of a high-level look at substantial presence test and how you count the days.
Jane Mepham, CFP (07:31.822)
That's great. So one of the questions that I've also seen, or at least when you start reading up on this is what is United States for purposes of the SPT test?
Manasa Nadig (07:48.052)
Yes, that's important to know because for the purposes of an SPT or a green card test, the United States, quote unquote, is it's all the 50 states and the District of Columbia. It is the territorial waters of the United States. And you'll find this interesting when they talk about territorial waters.
It's the seabed and subsoil of those submarine areas that are adjacent to the US territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources. And let's just take this a little further, it does not include US territories or US airspace.
Jane Mepham, CFP (08:40.058)
So it kind of raises the question, I guess, if you're flying in and where you were in the airspace, but I guess we can deal with that later. But it also means, I think based on what you're saying, that there are some exceptions to these rules. Would you like to go into some of that?
Manasa Nadig (08:58.196)
Yes, there are exceptions to this rule. So you do not count the days of presence in the United States with substantial presence test. For those days, you're commuting to work in the US if you are a resident of Canada or Mexico. And if you regularly come into the US for work, you do not count those days.
And then if you are transiting between two countries and you happen to be in the US for less than 24 hours while on this transit, you don't count those days. Of course, if you're a crew on a foreign vessel, the days in the US is not counted. And also, if you happen to be in the US,
Jane Mepham, CFP (09:33.208)
Thanks for watching!
Manasa Nadig (09:51.968)
but you're unable to leave the country because of a medical condition that develops while you were in the country, then those days are not part of the substantial presence test count. And also the days when you are an exempt individual. And there's more to the term exempt individual and we can dig deeper into that.
Jane Mepham, CFP (10:16.918)
So on this, actually before we get to the next point, when you talk about crew members of foreign vessel, it kind of brings to mind when you see all these crew ships coming to the US and they end up docking in different areas. So it sounds like for those people, regardless of how long they dock, that does not apply. Is that accurate?
Manasa Nadig (10:40.38)
I think that there is more to it than just that. I think the important part of that definition is the foreign vessels. So I guess it depends on where that cruise ship is registered and to what country it belongs to. Does that make sense?
Jane Mepham, CFP (10:58.694)
Yeah, it does. And I think from what I've seen with some of those, they tend to be registered outside the U S which is probably some of the considerations they've taken into account when they're trying to figure out quote unquote where they are registered. So that's actually, it's actually a pretty good point. Um, yeah. So do you have any more to add to this?
Manasa Nadig (11:19.149)
Yes.
Manasa Nadig (11:26.898)
Yes, so there are elections that you can make to not claim tax residency in the US, or you can make an election to override the green card test or the SPT test. And some of the cases where you're allowed to make elections which can override the green card test or the substantial presence test,
And these are at a high level. This is the first year choice to be treated as a resident. There is also an election that a non-resident spouse who is married to a US citizen or a green card holder, and they can make an election to be treated as a resident of the US, even though they may not fulfill the...
the days of presence in the US. And of course, there's the other one is the closer connection to a foreign country. You can claim closer connection to a foreign country, even though you were in the US and possibly, you know, passed this SPT. And of course, there are treaties, also known as double tax avoidance agreements between countries that might...
be worth looking into if you were looking for ways to avoid being treated as a US tax resident.
Jane Mepham, CFP (12:56.654)
So again, that actually raises some interesting planning opportunities, just going back to where you're eligible to use the test, but you choose not to. So if you choose to be treated as a resident or if you're non-resident spouse and you choose to be treated as a resident, this does mean you guys have to do your worldwide income reporting if you're filing a US residence, correct?
Manasa Nadig (13:02.188)
definitely.
Manasa Nadig (13:26.552)
Absolutely. And that is something that we always talk about, those planning opportunities, you know, on the one hand, it seems like it's a great plan for someone who has to now file as married filing separate, because, you know, they are in the US on a work visa, or rather non-immigrant work visa, and their spouse has not been able to join them because they don't have a visa yet.
So it might seem like it's a good option to file jointly because you get a higher tax deduction and are able to be in a lower tax bracket and things like that. But if your non-immigrant spouse, or your, sorry, your non-resident spouse has other accounts and other bank accounts or has other information that...
now will also need to be declared or disclosed to the United States because you became a resident of the U.S. because of this election, then that's definitely something that has to be taken into account. So it is a planning opportunity in the sense it might not work for everyone, and that's a caveat that you have to think about.
Jane Mepham, CFP (14:49.506)
So really what it sounds like, if you have an opportunity to override this before you make that kind of a move, reach out to CPA or EA who does cross border taxes and probably look at the two options filing as non-resident versus filing as a resident before you make the decision. I like that. And so, yeah.
Manasa Nadig (15:14.228)
Yes, yes. At any given point in time, I'm sorry, at any given point in time, this is something that I would definitely want someone, if they think that they fall into any one of these, you know, options that we talked about, that they should work with a professional. Yes.
Jane Mepham, CFP (15:36.462)
Great. So it then basically means when you think about what we've said so far, that they are exempt individuals for purposes of SPT or Substantial Presence Test. Would you like to go into some of this?
Manasa Nadig (15:53.696)
Yes, there are exempt individuals for purposes of SPT. And this is part of our discussion about what visa status you are under when you are in the US, right? So some visa statuses, which are non-immigrant visas, allow you to be in the country to do a certain type of work, but the days that you are in the US are not considered as
part of the substantial presence test for determining your tax residency. And some of these visas are, you know, an individual who's temporarily present in the US as a foreign government-related individual, and they are under an A or a G visa, and also individuals holding A3 or G5 class visas, or G visas are usually visas for issue to
those who work for world organizations like the World Bank or the UN, a teacher or trainee temporarily present in the US under a J or a Q visa, also a student, a student temporarily present in the US under an F, J, M or Q visa, and a professional athlete, who is temporarily present in the US.
to compete in a charitable sports event. So these are the visa holders who are exempt from counting days under SPT.
Jane Mepham, CFP (17:31.074)
So which is all great, but then it kind of raises, we just seem to be going down the rabbit hole, but that's fine. It kind of raises the next question. So if you want to exclude days of presence in the US for SPT purposes, how do you go about doing that?
Manasa Nadig (17:51.832)
So if for some reason you are in the US, but you do not want to count the number of days of presence in the US for tax purposes, you establish a closer connection exception to counting these dates. And this is very technical and unique to each individual. And we definitely cannot cover this in a podcast episode. I would say you should reach out to a cross-border tax professional.
who can help you with this. And the closer connection exception is also available to those who may not be able to leave the US as we spoke earlier due to medical reasons, which were diagnosed while they were here. So yeah, so those are some of the options to exclude your days of presence in the US for SBT purposes.
Jane Mepham, CFP (18:46.806)
Okay, so what it sounds like, I think what it's coming down to is your immigration status is not really the same as your tax residency status. And none of the tax residency status or types are bad. It's really, it just comes down to, it's a matter of understanding where you are, where you fall into, and then acting accordingly, right?
Manasa Nadig (19:12.339)
Mm-hmm.
Manasa Nadig (19:16.404)
Yes and also being mindful of what this means to your situation. So you know well we all know that if you become a tax resident of the US you have to declare your worldwide income and your worldwide assets and that is sometimes the most important reason why you have to count the number of days.
Jane Mepham, CFP (19:22.99)
Mm-hmm.
Manasa Nadig (19:45.484)
that you can be classified as a tax resident of the US, especially if you are switching from one visa status to another, right? For example, we talk about this a lot. If you are a student and now you're going to become an H1B visa holder, what happens to the SPT? Or if you are on an H1B or an L1 visa and you're switching to a green card.
what happens to SPT or what happens to closer connection. Or if you are on a different visa status like a J visa and you decide that you're going to continue to stay in the US, then you know there are ways that things can be looked at retroactively at your income. And so these are the many, some of the many different situations where SPT becomes important.
to look at and something that you want to talk about with a tax professional who is informed in this area.
Jane Mepham, CFP (20:53.683)
No, that sounds great. So is there anything else you'd like to add to this?
Manasa Nadig (21:00.344)
I think we covered a lot of the SBT information here today, which is of course high level. And some of this information is unique to each of you if this were to apply to you. So again, I reiterate, working with a tax professional is important.
Jane Mepham, CFP (21:21.65)
completely agree with you. So what's coming through is it's a bit of a complex area. It's always a good idea anytime you're not sure you're thinking about changing your status or you're just trying to figure out which way to go. You really want to reach out to a professional. So thank you so much for tuning into this episode. We'd really appreciate it if you can go to all the major platforms where you get your podcast and give us a like. And if you know
your friends or people that will be interested in this information, please share it with them. Thank you so much. This is Jane. And
Manasa Nadig (22:01.964)
This is Monasa, bye.
Jane Mepham, CFP (22:04.246)
Bye.