The 183-Day Rule for Tax Residency, Exceptions & Examples

The 183-Day Rule for Residency, Exceptions, and Examples

183-Day Rule

In most countries, Taxpayers are only taxed on their worldwide income (and required to report their foreign accounts, assets, and investments) when they are considered a tax resident of that country. And, in most countries, being a tax resident means residing in the country for more than half the year (aka 183 days in most years). The United States is different in that it requires anybody who is considered a U.S. Person for Tax Purposes to report their worldwide income and disclose their foreign assets, even if they reside abroad and earn all of their income from overseas. The United States has a 183-day rule as well, which may impact Taxpayers who are neither U.S. citizens (USC) of Lawful Permanent Residents (LPR). Let’s take a look at how the 183-day residence rules work.

Presence in the United States (183 Days)

If a foreign national, non-USC/LPR resides in the United States for at least 183 days in any one of the past three tax years, using a 1:1, 3:1, and 6:1 ratio respectively, then they may become subject to U.S. tax on their worldwide income – unless an exception, exclusion or limitation applies.

As provided by the IRS:

You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) 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.

Noting, if the Taxpayer does not meet the 31-day minimum requirement for travel to the U.S. in the current year, and/or qualifies for one of the exceptions (such as the closer connection exception), then they may avoid this harsh rule.

The Taxation of Capital Gains of Nonresident Alien Students (183-Day Rule)

There is another 183-day rule that foreigners should be aware of on matters involving U.S. capital gains.

As provided by the IRS:

• • • A flat tax of 30 percent (or lower treaty) rate is imposed on U.S. source capital gains in the hands of nonresident alien individuals present in the United States for 183 days or more during the taxable year. This 183-day rule bears no relation to the 183-day rule under the substantial presence test of IRC section 7701(b)(3). This rule applies even if any of the transactions occurred while you were not in the United States.

Foreign Country 183 Day Test

Many foreign countries have their 183-day test, which applies to non-citizens of that country who reside in that foreign country for at least 183 days.

Here is an example from the ATO (Australia)

What is the 183-day test

• • • If you’re in Australia for more than half the income year, continuously or intermittently, you will be a resident of Australia unless both:

      • your usual place of abode is outside Australia

      • you have no intention to take up residence here.

        • In this test, we must be satisfied that your usual place of abode is outside Australia. This is different to the first test (domicile) that requires us to be satisfied that your permanent place of abode is outside Australia.

Applying the 183-day test

• • • Your presence in Australia doesn’t need to be continuous for the purposes of the 183-day test. All the days you’re physically present in Australia during the income year will be counted. This includes the day of your arrival and departure. It’s important to note that the 183-day test applies in relation to the year of income, not the calendar year.

Are you an Australian resident for tax purposes?

• • • If you’re an Australian resident for tax purposes, you need to declare all income earned both in Australia and overseas on your Australian tax return (even if you’ve already paid tax on it overseas).

    • If you’ve paid foreign tax on income in another country, you may be entitled to an Australian foreign income tax offset.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.