U.S. Residence and the Closer Connection Test – International Tax Lawyers
For many foreigners who come to the United States as a legal permanent resident, they are surprised to learn that they will be subject to US tax in the same way as US citizens. In other words, the United States will tax them on their worldwide income.
Before somebody becomes a legal permanent resident they are often in the United States on a temporary visa. When a person is here on a temporary visa, there are different rules in place depending on the type of visa that the person has as to whether they will be subject to U.S. Tax as a Resident or Non-Resident.
For example, if a person has an F-1 visa and is a student then generally they are not subject to US taxation as a US resident for the first five years. Thus, when a person is in the United States on an F-1 visa then for the first five years they are in the United States their days of residence are not applied to the substantial presence.
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.
What is the Closer Connection Test
There are situations in which a person would otherwise be subject to US tax due to having met residence requirements, but because they have a “closer connection” with a different country, they are spared US tax residence rules unless the person is a Legal Permanent Resident or applied for a Status Change.
Have You Applied to Become a Permanent Resident
Once a person becomes a legal permanent resident there no longer able to claim a closer connection with another country under the closer connection test. As provided under IRC 7701(b), The person may cannot have had taken any steps to change his nonimmigrant status in the United States toward becoming a permanent resident of the United States. If so, they cannot qualify as having a closer connection with a different country.
The following s a summary of the Closer Connection Test as provided by the IRS
Even if you meet the substantial presence test, you can still be treated as a nonresident alien if you:
- Are present in the United States for less than 183 days during the year,
- Maintain a tax home in a foreign country during the year (Refer to Chapter 28 of Publication 17for a discussion of the tax home concept), and
- Have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries, discussed next).
For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year, and must be located in the same foreign country for which you are claiming to have a closer connection.
Closer Connection to Two Foreign Countries
You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if you meet all of the following conditions:
- You maintained a tax home beginning on the first day of the year in one foreign country,
- You changed your tax home during the year to a second foreign country,
- You continued to maintain your tax home in the second foreign country for the rest of the year,
- You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country, and
- You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.
Establishing A Closer Connection
You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States. In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following:
- The country of residence you designate on forms and documents
- The types of official forms and documents you file, such as Form W-9, Request for Taxpayer Identification Number and Certification, W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, or W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States.
- 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.
Note: It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays.
When You Cannot Claim Closer Connection to a Foreign Country
You cannot claim you have a closer connection to a foreign country if either of the following applies:
- You personally applied, or took other steps during the year, to change your status to that of a Lawful Permanent Resident, or
- You had an application pending for adjustment of status to Lawful Permanent Resident during the current year.
Indications of Intent to Change Your Status
If you have filed any of the following forms, this is an indication that your intent is to become a Lawful Permanent Resident of the United States, and is an indication that you are not eligible for the Closer Connection Exception.
- Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities
- Form I-485, Application to Register Permanent Residence or Adjust Status
- Form I-130, Petition for Alien Relative
- Form I-140, Immigrant Petition for Alien Worker
- Form ETA-750, Application for Alien Employment Certification
- Form OF-230, Application for Immigrant Visa and Alien Registration
How to Claim the Closer Connection Exception
You must file Form 8840, Closer Connection Exception Statement for Aliens, to claim the Closer Connection Exception. If you are filing a U.S. federal income tax return please attach Form 8840 to the income tax return. If you do not have to file a U.S. federal income tax return, send Form 8840 to the Internal Revenue Service Center (indicated in the instructions attached to Form 8840) by the due date for filing the income tax return.
Requirement to File Form 8840
If you do not timely file Form 8840, Closer Connection Exception Statement for Aliens, you cannot claim a closer connection to a foreign country or countries. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.
The Closer Connection Exception for Students
If you are a student and you do not qualify for the closer connection exception described above using Form 8840, you may qualify for the closer connection exception for students only. Refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students.
- Determining Alien Tax Status
- Publication 519, U.S. Tax Guide for Aliens
- Treasury Regulation 301.7701(b)-2
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
It should be noted that specific Visa requirements and exceptions/exclusions to the Substantial Presence Test may be available under specific country treaty laws.