While the “substantial presence” test often determines whether a nonimmigrant alien individual will be treated as a U.S. person for federal tax purposes, the test is subject to an important exception: the closer-connection exception. Generally, under the substantial presence test, an alien individual is classified as a U.S. person for federal tax purposes if he or she is physically present in the United States for 183 or more days during a calendar year, after applying a weighted formula across a three-year “lookback” period. But even where an individual satisfies the substantial presence, the closer-connection exception may prevent U.S.-resident status. To determine whether the exception applies, it is necessary to analyze the taxpayer’s presence in the U.S., tax home, and relative connection to the foreign country.
A Closer Connection to a Foreign Country
An individual who meets the substantial presence test may nonetheless be treated as a nonresident alien if they:
- 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, and
- Have a closer connection during the year to one foreign country in which the individual has a tax home than to the United States (note that an exception applies where the taxpayer has a closer connection to two foreign countries).[1]
Tax Home
While there are some splits of authority, depending on the taxpayer’s location, a taxpayer’s tax home is generally considered to be the area of their main place of business, employment, or post of duty.
That is, regardless of where the taxpayer maintains their family home, their tax home is the place where the taxpayer permanently or indefinitely works as an employee or a self-employed individual.
If the taxpayer does not have a regular or main place of business because of the nature of their work, the taxpayer’s tax home is the place where they regularly live.
Taxpayers who do not fit either of these categories are considered to be itinerant, in which case the taxpayer’s tax home is wherever they work.
For purposes of the closer-connection exception, the taxpayer’s tax home must be in existence for the entire current year and must be located in the same foreign country to which the taxpayer is claiming to have a closer connection.
Establishing a Closer Connection
A taxpayer has a closer connection to a foreign country if they have maintained more significant contacts with the foreign country than with the United States. This inquiry is based upon the facts and circumstances, which may include:
- The country of residence that the taxpayer designated on forms and documents.
- The types of official forms and documents that the taxpayer filed, such as Form W-9, Form W-8BEN, or Form W-8ECI.
- The location of the taxpayer’s:
- permanent home;
- family;
- personal belongings, such as cars, furniture, clothing, and jewelry;
- current social, political, cultural, professional, or religious affiliations;
- business activities (other than those that constitute your tax home);
- jurisdiction in which you hold a driver’s license;
- jurisdiction in which you vote; and
- Charitable organizations to which the taxpayer contributes.
No Closer Connection
The IRS maintains that a taxpayer generally cannot claim a closer connection to a foreign country if either of the following applies:
- The taxpayer personally applied, or took other steps during the year, to change their status to that of a permanent resident;[2] or
- The taxpayer had an application pending for adjustment of status during the current year.
Form 8840
A taxpayer must file a Form 8840 with their income tax return to claim a closer connection to a foreign country or countries. The Form 8840 must be filed by the due date for filing Form 1040-NR.
A taxpayer who does not timely file Form 8840 may be prohibited from claiming a closer connection to a foreign country or countries. A narrow exception, however, applies where the taxpayer can show by clear and convincing evidence that they took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements. Because the stakes are often high, a taxpayer seeking to make a late election on Form 8840 should consult a tax attorney.
Tax Treaties
Even if a taxpayer does not qualify for the closer connection exception, they may nonetheless qualify for nonresident status under a tax treaty. For example, if the individual is a dual-resident under the tax laws of both the U.S and a tax treaty country, the taxpayer may qualify to claim benefits under an income tax treaty.
[1] A taxpayer can generally demonstrate a closer connection to two foreign countries if the taxpayer met the following conditions:
- The taxpayer maintained a tax home beginning on the first day of the year in one foreign country.
- The taxpayer changed their tax home during the year to a second foreign country.
- The taxpayer continued to maintain their tax home in the second foreign country for the rest of the year.
- The taxpayer had a closer connection to each foreign country than to the United States for the period during which the taxpayer maintained a tax home in that foreign country.
- The taxpayer is 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 the taxpayer maintained a tax home in each foreign country.
[2] Steps that may constitute efforts to change a taxpayer’s status to that of a permanent resident include, but are not limited to, the filing of the following forms:
- Form I-508, Request for Waiver of Certain 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 Workers.
- Form ETA-750, Application for Alien Employment Certification.
- Form OF-230, Application for Immigrant Visa and Alien Registration.
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