Blog post

Key Points

• The Substantial Presence Test determines if non-U.S. citizens are considered U.S. tax residents based on their physical presence in the U.S.
• Form 8840, the Closer Connection Exception Statement, allows individuals to claim a closer connection to another country, avoiding U.S. tax residency.
• Meeting the Substantial Presence Test without filing Form 8840 could result in being taxed as a U.S. resident.
• Accurately completing and timely filing Form 8840 is crucial for Canadians and other non-U.S. citizens who spend significant time in the U.S.
• Consulting with a cross-border tax professional is essential to ensure compliance and avoid unintended U.S. tax obligations.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

Question

Hi

My wife and I live in Canada, however we spend quite a bit of time in the US. We were told by friends that if I spend a specific amount of months each year in the US I might have to file US tax returns. However they also said that a special exemption form can also be filed.

Do you know anything about this?

Answer

Yes, if you spend time in the US you may be required to file a US tax return if you meet the substantial presence test. However filing form 8840 could be an option to avoid the filings.

The US Substantial Presence Test (SPT) is a way to determine whether a foreign person has to file a US tax return. The test is based on the amount of time a person is present in the US during a year. The SPT is an important tool for individuals who are nonresident aliens and are living and working in the US, as it helps to determine if they must pay US taxes.

Under the SPT, a person must be physically present in the US for at least 31 days during the current year and 183 days during the period of three years, including the current year. The 183-day total is calculated by taking the number of days present in the current year and adding one-third of the days present in the previous year and one-sixth of the days present in the year two years ago.

For example, consider a foreign person who arrived in the US on April 1, 2020, and stayed for 182 days. For 2021, the person was present in the US for 186 days. For 2022, the person was present in the US for 190 days. To calculate the person’s presence in the US for the three-year period, the following equation is used:

Current Year (2020): 182 days

Previous Year (2021): 186 days x 1/3 = 62 days

Two Years Ago (2022): 190 days x 1/6 = 31.5 days

Total Days Present in the US: 275.5 days

Since the total days present in the US is greater than 183 days, the person is considered a resident alien for US tax purposes and must file a US tax return. You can also check for yourself on our new substantial presence calculator.

It is important to note that a person can avoid having to file US tax returns by filing Form 8840, also known as the Closer Connection Exception Statement for Aliens. Form 8840 must be filed by the due date of the person’s US tax return. It is used to declare that the person has a closer connection to a foreign country than to the US and that the person does not meet the substantial presence test.

In order to qualify for the closer connection exception, a person must meet certain criteria. The person must have a tax home in a foreign country, must be present in the US for fewer than 183 days in the current year, and must have a closer connection to a foreign country than to the US. The person must also provide evidence of a closer connection to the foreign country, such as a valid residence visa, a valid driver’s license, or other documents showing a closer connection to the foreign country.

If the person meets all of the criteria, then Form 8840 can be filed to avoid having to file a US tax return. However, it is important to note that the person must still pay any taxes due on any US income they received, if required.

In conclusion, the US Substantial Presence Test is an important tool for determining whether a foreign person must file a US tax return. By filing Form 8840, a person can avoid having to file US tax returns and still pay any taxes due on US income. It is important to note that the criteria for qualifying for the closer connection exception must be met in order for Form 8840 to be valid.