While applying for, and obtaining a nonimmigrant visa or legal permanent resident card in the United States is a very overwhelming and daunting process – the United States makes it relatively easy for it to exert its tax laws over an unsuspecting foreigner.
U.S. Tax Laws
United States tax laws are very different than other countries. That is because in the United States, if you are considered a US taxpayer (US citizen, Legal Permanent Resident, or foreigner subject to the Substantial Presence Test) then you become subject to US tax on your worldwide income.
For a US citizen and even Legal Permanent Resident, it is otherwise expected that if your goal is to become a citizen or long-term resident of the United States that you will become subject to US tax laws. But, for a foreigner who may only be in the United States temporarily and receive no guidance on what the tax requirements are in the United States (other than the fact that income taxes are being withheld from his or her salary) they may be in for a big surprise to learn that they have met the substantial presence test.
What is the Substantial Presence Test?
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
The reason why we are spending more time with explaining the substantial presence test and utilizing different examples of individuals who are subject to is because it appears Internal Revenue Service (IRS) in accordance with FATCA and FBAR filing requirements, is enforcing these laws more so than in years past.
The following is a summary of the substantial presence test followed by a summary of general tax laws that expats should be aware of:
Exceptions to the Substantial Presence Test
The goal of the United States is not to trick individuals into getting tax as if they were US persons – rather, it is to ensure that the United States can collect tax on individuals who enjoy the benefit of residing in the United States. In order to combat against certain individuals who clearly had no intent of being substantially present in the United States from being subject to tax as if they were a US person, the following are some common exceptions that may assist you:
Commuters from Canada and Mexico
The general rule is that if a person regularly commutes from either Canada or Mexico to the United States than during the day of commuting, it is not counted toward the days needed to meet the substantial presence test. There are certain restrictions, including the requirement that the individual commute to a US place of employment or self-employment on more than 75% of the work that is included in the working period.
For example, a person is traveling between two different locations outside of the United States but the airplane stops in the United States for a layover for less than 24 hours than the layover does not count toward the substantial presence. It is very important to keep in mind that if business is conducted (even at the airport) and the stopover will count toward the center present test.
*This exception comes into play when a person may have came to the United States for significant portion of time earlier in the year and is on the cusp of meeting the substantial presence test and still has some traveling to do in which he or she will be spending even layovers in the United States.
It is important to note that to meet the medical emergency exception the person must have intended on leaving the United States but only due to a medical emergency was unable to. This is not the same as coming to the United States for the purpose of medical care and then being forced to remain in the United States (in the latter scenario it will be much more difficult to meet the substantial presence test exception.)
Most of the time, Diplomats and their immediate family members are not subject to the substantial presence test.
Certain Visa Holders
Generally, teachers, trainees and students are not subject to the substantial presence test until they made other requirements such as spending significant amounts of time in the United States following the expiration of the visa or during graduate studies.
Charitable Sports Events
If a professional athlete has come to the United States for the purpose of participating in a charitable sport event, then those days are not applied toward meeting the substantial presence test.
These are just some of the more common exceptions to the substantial presence. Expats in general have certain requirements they must be aware of when traveling.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel
Generally, experienced attorneys in this field will have all the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.