If I am a foreigner residing in the United States, do I need to pay federal income taxes?
Foreigners residing in the United States are subject to federal income tax requirements if they are present in the U.S. for a substantial number of days per year. If you are a foreigner residing in the U.S. for only a few months of the year, you are required to pay federal income if you meet the Substantial Presence Test. Even if you meet the substantial presence test, you can still be classified as a nonresident alien by the IRS if you meet the Closer Connection Exception.
What is the Substantial Presence Test?
Generally, a foreigner meets the substantial presence test if he or she were physically present in the U.S. for at least 31 days during the current year and 183 days during the last three years. However, the test is weighted in order to place importance on the individual’s physical presence in the more recent years.All days of physical presence in the current year (2021) are counted, but only 1/3 of the days of physical presence in the preceding year (2020) are counted, and only 1/6 of the days of physical presence in the year preceding that (2019) are counted. For example, if you are a Canadian citizen but were physically present in Florida for 120 days in 2021, 120 days in 2020, and 120 days in 2019, you would not be considered a resident under the substantial presence test because the weighted three-year total is only 180 days.
If you meet the substantial presence test, you are officially considered a U.S. resident by the IRS. However, you can bypass their tax reporting requirements by meeting the Closer Connection Exception.
What is the Closer Connection Exception?
Even if you meet the substantial presence test, you can claim the closer connection exemption by establishing a closer connection to another country upon three conditions:
- You were present in the U.S. for fewer than 183 days during the current year;
- You have a tax home in a foreign country; and
- During the current year, you had a closer connection to one foreign country in which you have a tax home than to the United States.
You can also meet the exception by demonstrating a closer connection to two foreign countries.
What is the meaning of “Tax Home?”
For purposes of the closer connection exception, your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain a family home. A tax home is where you permanently or indefinitely work. If you do not have a main place of business, your tax home is the place where you regularly live. Your tax home must exist for the entire year, and must be in the country which you are claiming to have a closer connection with.
What forms do you need to file to establish “Closer Connection”?
To establish a closer connection, you must file the Closer Connection Exception Statement for Aliens (Form 8840). Form 8840 must be attached to Form 1040-NR, which is the U.S. Nonresident Alien Income Tax Return. Form 8840 cannot be filed after the due date for Form 1040-NR. This due date is generally April 15 for those who are employees that receive wages subject to U.S. income tax withholding or have a place of business in the U.S. The due date is generally June 15 for those who do not receive wages subject to U.S. income tax withholding or have a place of business in the U.S. Extensions can be granted through Form 4868. Form 8840 needs to be filed annually to avoid being subject to U.S. federal income taxation, as the substantial presence test will be applied yearly.
Who determines if you meet the Closer Connection Exception?
The IRS has discretion in determining whether a “closer connection” was established. In order to establish a closer connection, you must maintain more significant contacts with a foreign country than within the United States. The IRS, among other factors, considers:
- where your regular permanent home is located;
- where your family is located;
- where your automobiles are located/registered;
- where your personal belongings are located;
- where you conduct business activities;
- where your driver’s license is registered;
- where you are registered to vote;
- what country you list as your country of residence on official documents;
- what country you derive the majority of your yearly income from;
- what country/countries your investments are located;
These factors are not exclusive, and other factors can be considered in a closer connection determination.