What Is SPT Tax and How Does It Affect Your Residency Status?

The Substantial Presence Test (SPT) determines whether a non-U.S. citizen qualifies as a tax resident for federal income tax purposes. This classification affects tax obligations, including filing requirements and liability for worldwide income.

Understanding how the SPT works is essential for individuals spending extended time in the U.S., particularly those on visas or with business ties. Even short visits can contribute to residency status under certain conditions.

Criteria for the Test

The IRS determines tax residency using a formula based on the number of days an individual spends in the U.S. over a three-year period. This calculation applies a weighted system rather than a simple count of days in a single year.

To meet the Substantial Presence Test for the current tax year, an individual must be physically present in the U.S. for at least 31 days. Additionally, the total number of days over the past three years is calculated as follows:

– All days from the current year count in full.
– One-third of the days from the previous year are included.
– One-sixth of the days from two years prior are considered.

If the sum of these weighted days equals or exceeds 183, the individual is classified as a tax resident.

Certain days do not count toward this total, including time spent in the U.S. as a crew member of a foreign vessel, specific medical exemptions, and some diplomatic or government-related stays. These exclusions can significantly impact whether an individual meets the threshold, making it important to track days accurately.

Day Counting Methods

The IRS applies specific rules to determine how many days an individual has been present in the U.S. for the Substantial Presence Test. Since the calculation spans multiple years, different rules apply to how days are counted and weighted.

Weighted Days

The Substantial Presence Test does not treat all days equally. Instead, the IRS applies a weighted formula to account for time spent in the country over a three-year period.

For example, if an individual was in the U.S. for 120 days in 2024, 150 days in 2023, and 180 days in 2022, the calculation would be:

– 120 days from 2024 (full value)
– 50 days from 2023 (150 ÷ 3)
– 30 days from 2022 (180 ÷ 6)

This results in a total of 200 weighted days, exceeding the 183-day threshold, meaning the individual would be considered a tax resident for 2024.

Three-Year Lookback

The three-year lookback rule prevents individuals from avoiding tax residency by limiting their stays in any single year while still spending significant time in the U.S.

For instance, someone who spends 120 days in the U.S. each year might assume they are below the 183-day threshold annually. However, under the three-year lookback, their weighted total would be:

– 120 days from the current year
– 40 days from the previous year (120 ÷ 3)
– 20 days from two years prior (120 ÷ 6)

This results in 180 weighted days, just under the threshold. A few additional days in any of those years could make them a tax resident.

Exclusions

Certain days spent in the U.S. do not count toward the Substantial Presence Test. The IRS provides specific exemptions, including:

– Medical Condition Exception (IRC 7701(b)(3)(D)): If an individual cannot leave the U.S. due to a medical condition that arose while in the country, those days may be excluded. Pre-existing conditions do not qualify.
– Exempt Individuals (IRC 7701(b)(5)): This includes foreign government officials on diplomatic visas, teachers and students on F, J, M, or Q visas, and certain professional athletes competing in charitable events.
– Commuters from Canada or Mexico: Individuals who regularly commute to the U.S. for work but maintain a residence in Canada or Mexico may exclude commuting days.

To claim an exclusion, individuals must file Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, with their tax return. Proper documentation is essential, as the IRS may require proof of eligibility.

Residency Classification

Once an individual meets the Substantial Presence Test, they are classified as a U.S. tax resident for that year. This means they are subject to the same tax rules as U.S. citizens, including reporting and paying taxes on worldwide income. Unlike nonresidents, who are only taxed on U.S.-sourced income, tax residents must disclose foreign earnings, bank accounts, and certain financial assets, often triggering additional reporting obligations under laws like the Foreign Account Tax Compliance Act (FATCA).

Tax residency is separate from immigration status but can still have implications. Visa holders who become tax residents might inadvertently affect their visa conditions, especially if they claim treaty benefits that conflict with residency status. Some tax treaties between the U.S. and other countries provide “tie-breaker” rules that allow individuals to remain classified as nonresidents for tax purposes, even if they meet the Substantial Presence Test. These provisions typically consider factors such as permanent home location, center of vital interests, and habitual abode. To claim treaty benefits, individuals must file Form 8833, Treaty-Based Return Position Disclosure, with the IRS.

Residency start and end dates also play a role. If someone becomes a tax resident under the Substantial Presence Test, their residency typically begins on the first day they were physically present in the U.S. during that year. However, individuals who leave the U.S. before meeting the test may qualify for a dual-status residency classification, meaning they are treated as a nonresident for part of the year and a resident for the remainder. This affects how income is taxed, as only U.S.-sourced income is taxed during the nonresident portion, whereas worldwide income applies once residency begins. Dual-status taxpayers cannot file jointly with a spouse unless they elect to be treated as full-year residents, which may be beneficial in certain cases.

Filing Obligations

Non-U.S. citizens who qualify as tax residents under the Substantial Presence Test must comply with extensive filing requirements. The primary obligation is filing Form 1040, U.S. Individual Income Tax Return, rather than Form 1040-NR, which is used by nonresidents. Residents are taxed on worldwide income, requiring them to disclose foreign earnings from wages, rental properties, business activities, and investment accounts. Any failure to report foreign income can lead to penalties under IRC 6662, which imposes accuracy-related fines of up to 20% of the underpaid tax.

Tax residents with foreign financial accounts exceeding certain thresholds must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), under 31 U.S.C. 5314. The FBAR applies if aggregate foreign account balances exceed $10,000 at any point during the year, and failure to file can result in penalties ranging from $500 for non-willful violations to greater of $100,000 or 50% of unreported balances for willful violations. Additionally, individuals with foreign assets exceeding $50,000 (or higher, depending on filing status and residency location) may need to file Form 8938, Statement of Specified Foreign Financial Assets, under FATCA (IRC 6038D).

Tax residents may also be responsible for estimated tax payments if they do not have sufficient withholding on wages or other income sources. Under IRC 6654, individuals who owe more than $1,000 in tax liability after withholding must make quarterly payments to avoid penalties. For self-employed individuals, self-employment tax under IRC 1401 applies at a rate of 15.3% on net earnings up to $168,600 (for 2024) and 2.9% on amounts exceeding that threshold, with an additional 0.9% Medicare surtax for income above $200,000 (single) or $250,000 (married filing jointly).

Special Exemptions

Exempt Individuals

Foreign government officials on A or G visas, teachers and trainees on J or Q visas, and students on F, J, M, or Q visas are exempt under IRC 7701(b)(5).

Closer Connection Exception

Individuals who meet the Substantial Presence Test but maintain stronger ties to another country may claim the Closer Connection Exception under IRC 7701(b)(3)(B) by filing Form 8840.