Tax Residency and Substantial Presence Test

Background

Under U.S. tax laws, all non-U.S. citizens are considered to be either permanent resident aliens, resident aliens for tax purposes, or nonresident aliens. Permanent resident aliens and resident aliens for tax purposes are taxed the same as U.S. citizens while nonresident aliens are taxed under special laws.

Objective

To provide MnSCU institutions with procedures to identify nonresident aliens and to comply with federal and state tax laws as they apply to nonresident alien employees.

Student Payroll Tax Residency Information Form
(See Appendix Q)

This two sided form is to be filled out by all student employees who attest on their I-9 that they are an "other alien authorized to work until xx/xx/xx" (enter either a date in the future or D/S for duration of status).

The form serves two purposes:

Aids the institution in determining the alien individual's residency for tax purposes.
Records that the alien individual has certified that the information they have provided the institution is accurate.

The Tax Residency Information Form is to be filled out and signed by all alien employees.

U.S. Tax Residency

To determine an employee's residency for tax purposes, the withholding agent must review the individual's U.S. citizenship status and/or visa and immigration documentation. Employees who are not U.S. citizens must complete the Tax Residency Information Form (see Appendix Q). The information collected on this form will aid the institution in applying the tax residency tests needed to determine an employee's tax residency status.

There are two tests used to determine whether a non U.S. citizen should be treated as a U.S. resident for tax purposes:

The "Green Card" test, and
The Substantial Presence Test

If the non U.S. citizen passes either test, the individual may be considered a resident for tax purposes. If the non U.S. citizen passes neither test, the individual is a nonresident alien for tax purposes.

The "Green Card" Test

Simply put, if the individual is a lawful permanent resident alien, i.e. has a "green card", the individual will be treated as a resident alien for tax purposes.

The individual is a lawful permanent resident alien if he/she:

Has been granted lawful permanent resident status in the U.S., and
Has been issued or will receive an alien registration card (a.k.a. "green card") by U.S. Immigration.

Substantial Presence Test (SPT)

The substantial presence test is a mathematical calculation of days present in the U.S. used to determine tax residency. This test should be applied each calendar year. It is recommended that the withholding agent calculate and record the earliest future date that the alien employee is expected to satisfy this test, known as the residency status change date.

There are two parts to the substantial presence test:

the 31-Day Test
the 183-DayTest

An alien will satisfy the substantial presence test if he/she is physically present in the U.S. for at least

31 days during the current calendar year, and
183 days during a three-year period counted as follows:
- all the days present during the current calendar year, plus
- 1/3 of the days present during the preceding calendar year, and
- 1/6 of the days present during the second preceding year.

Calculating the 183-Day Test

To determine if the alien meets the 183 day test, count the days the alien was present in the U.S. If the alien is present in the U.S. during any part of a day, that day will be counted towards substantial presence (see Exceptions to Days Counted Toward Substantial Presence, pg. 3).

Add together:

all the days present during the current calendar year, plus
1/3 of the days present during the preceding calendar year, and
1/6 of the days present during the second preceding year.

If the total days counted is less than 183 days, the individual is treated as a nonresident alien for tax purposes. If the total days counted is greater than or equal to 183 days, the individual is treated as a resident alien for tax purposes (see Exception to Substantial Presence Test).

Example A

Does Lorena, an alien who was physically present in the U.S. for 138 days in 1998, 129 days in 1999, and 120 days in 2000, meet the substantial presence test for 2000?

Apply the 183 day test as follows:
2000: 120 days
1999: (129 x1/3) = 43 days
1998: (138 x 1/6) = 23 days
Total days present in U.S. = 120 + 43 + 23 = 186 days

Yes, Lorena is considered a resident alien for tax purposes because

She has been present for over 31 days in current calendar year, and
Her total number of days in the U.S. for the three-year period as calculated by the substantial presence test was over 183 days.

Example B
[Note:This example and those that follow have been adapted from IRS Publication 678FS, VITA Assistor's Guide 2001, Foreign Student and Scholar Text.]

Fiona, an alien, is present in the United States for 25 days during the current year. She was present in the United States for 365 days during the first preceding year and 365 days during the second preceding year. The substantial presence test does not apply because Fiona is present in the United States for fewer than 31 days during the current year.

Exception to Substantial Presence Test

An individual can meet the substantial presence test and still be a nonresident alien for tax purposes if the alien meets all of the following:

Is present in the U.S. for fewer than 183 days in the current calendar year;
Maintains a "tax home" in a foreign country during the current year; and
Has a "closer connection" [as defined by Treasury Regulations ?? 301.7701 (b)-2] with the foreign country in which he/she maintains a tax home than to the U.S.
Claims this exception by attaching a closer connection exception statement to his/her tax return [See Section 301.7701(b)-8(b)(1) of the regulations for details on what information must be included in the closer connection exception statement].

Generally the only time the closer connection exception will apply to educational visa holders is the year of departure, when the individual:

meets the other two components of the closer connection exception,

has passed the SPT and has already been treated as a resident alien for at least one calendar year, and

will be in the U.S. for less than 183 days during the current year, but meets the 183-day test for that year only because of the "look back" rule that requires the counting of days in the prior years.

Exceptions to Days Counted Toward Substantial Presence

When calculating the days an individual is physically present in the U.S. for purposes of the substantial presence test, those days on which an individual meets any of the following criteria will not be counted:

Any days the individual regularly commutes to work in the U.S. from a residence in Canada or Mexico
Any days the individual is in the U.S. for less than 24 hours when in transit between two places outside of the U.S.
Any days the individual was unable to leave the U.S. due to a medical condition that developed while he was in the U.S., and
Any days the individual was present in the U.S. as an "exempt individual".

Exempt Individual: Concept and Rules

"Exempt individuals" are those individuals present in the U.S. for the primary purpose of being:

a teacher or trainee (generally present under a "J" or "Q" visa; includes all "J" non-student categories)
a student (generally present under a "F", "J", "M" or "Q" visa)
a "foreign government-related" individual (generally a foreign diplomat or consular officer present under an "A" or "G" visa)
a professional athlete (generally present under a "P" visa)

In order to qualify for exempt individual status the individual must be in substantial compliance with the requirements of his/her particular visa.

Note: F, J, M or Q student visa holders will not qualify for "exempt individual" status if they have had that status for any part of more than five calendar years. J or Q non-student visa holders will not qualify for "exempt individual" status if they were exempt as a teacher, trainee, non-student or student for any 2 of the last 6 calendar years.

Example C

Julianna came to the U.S. on an F-1 visa in October 1998 to study at St. Cloud State University. She had never been in the U.S. before.

As a student, she is exempt from counting her days of presence during her first 5 years - which are 1998, 1999, 2000, 2001 and 2002. If she remains in the U.S. for all of 2003, she will meet the substantial presence test at the beginning of July (residency status change date).

The withholding agent will begin to treat Julianna as resident alien for tax purposes on January 1st, 2003 (residency starting date). MnSCU records 2003 as Julianna's residency start year.

Example D

Eduard is a junior at Metropolitan State University. He came to the U.S. in 1998 from France, his home country.

He studied in the U.S. until the end of 1999, and then returned home. He re-entered the United States under an F-1 visa in 2001 to study at Metropolitan State University. For federal income tax purposes, he is still a nonresident alien because he has not yet been in the U.S. for 5 years Eduard's residency start year is 2004.

Year	Actual Days Present	Visa Type	SPT Exemption Status	Notes	Tax Residency Status
2001	365	F1	Exempt	Eduard returns under a F1 visa to study at Metropolitan State University.	Eduard is a nonresident alien for tax purposes. This is the third of the 5 years that Eduard is exempt from counting days towards substantial presence.
2000	0		n/a	Not present in the U.S.	Because Eduard was not in the U.S. in 2000, this year is not considered when determining how many exempt years Eduard has remaining.
1999	365	F1	Exempt	Eduard returns to France at the end of 1999.	Eduard is a nonresident alien for tax purposes. This is the second of 5 years that Eduard is exempt from counting days towards substantial presence.
1998	365	F1	Exempt	Eduard arrives to study under a F1 visa	Eduard is a nonresident alien for tax purposes. As an F-1 visa holder in the U.S. for the first time, he is exempt from counting days towards substantial presence for 5 calendar years.

Other Substantial Presence Test Issues

The substantial presence test is more difficult to apply when an individual is present in the U.S. during the second, third or more visit under an immigration status different than past visits. Basically, the following statements hold true when trying to calculate the substantial presence test for an alien individual who has been present in the U.S. under both the "student' and "non-student" exempt individual statuses:

Apply the exempt individual rule applicable to the current immigration status of the individual at the time the test is calculated,
All of the years of exempt individual status should be applied for the period in question, regardless of whether the year was a student or non-student exempt individual year
The total number of exempt individual years may not exceed five, regardless of the rule currently applicable, and
The withholding agent should not change the way exempt individual years were applied in past years.