Substantial Presence Test & Closer Connection Exception

Many inhabitants of the northern United States or Canada seek respite from colder climates by living part of the year in warmer climates of states in the southern United States, particularly Florida and Arizona. While these people are commonly referred to as "snowbirds" in the warmer states they call home during winter, the Internal Revenue Service I.R.S. has another, seemingly less friendly, name for those non-U.S. citizens who do so: aliens.

According to the I.R.S., an alien is "an individual who is not a U.S. citizen or U.S. national (a person who owes his/her sole allegiance to the United States)." The I.R.S. further classifies aliens as either "resident" or "non-resident". Resident aliens must, among other things, pay various taxes to the U.S. government, while non-resident aliens are not so required.

When Is An Alien A Resident Alien?

For tax purposes, the I.R.S. characterizes a person as a resident alien, subject to exceptions, if the person meets either the "Green Card Test" or the "Substantial Presence Test". 

The Green Card Test

The I.R.S. considers a person who is an "immigrant" of the United States, under U.S. immigration laws,  a resident alien if that person spends at least one day per year in the United States.

The I.R.S. defines an immigrant as follows:

An alien who has been granted the right by the USCIS to reside permanently in the United States and to work without restrictions in the United States. Also known as a Lawful Permanent Resident (LPR). All immigrants are eventually issued a "green card" (USCIS Form I-551), which is the evidence of the alien’s LPR status. LPR’s who are awaiting the issuance of their green cards may bear an I-551 stamp in their foreign passports.

If a person meets any of the foregoing requirements, that person is a resident alien and is subject to taxation by the U.S. government.

Substantial Presence Test

The I.R.S. considers a person a U.S. resident for tax purposes if the person is physically present in the United States for at least:

  1. 31 days during the current year, and
  2. 183 days during the 3-year period that include the current year and the 2 years immediately before that, counting:
    • All the days the person was present in the current year, and
    • 1/3 of the days the person was present in the first year before the current year, and
    • 1/6 of the days the person was present in the second year before the current year.

In other words, the so-called "183-day limit" is not applicable to only one (1) year; rather, that 183 days is associated with a period of three (3) years. Put another way, if an alien spends 182 non-exempt, days per year each year over a three (3) year period in the United States, the I.R.S. considers such a persons a resident alien.

Although there are a number of exceptions to the Substantial Presence Test, one exception is likely of particular importance to so-called "snowbirds": The Closer Connection exception

Closer Connection Exception

If an alien does not meet the requirements of the Substantial Present Test, but has a closer connection to his/her home county than to the U.S., he/she may be able to claim a "Closer Connection" exception. But how does the I.R.S. determine if a person has a closer connection?

The I.R.S. has articulated the following factors that are used to analyze whether a person meets the "Closer Connection" exception:

  • The location of the person's permanent home.
  • The location of person's family.
  • The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by the person and the person's family.
  • The location of social, political, cultural, professional, or religious organizations with which person has a current relationship.
  • The location where the person conducts the person's routine personal banking activities.
  • The location where the person conducts business activities (other than those that go into determining the person's tax home).
  • The location of the jurisdiction in which the person holds a driver's license.
  • The location of the jurisdiction in which the person votes.
  • The location of charitable organizations to which the person contributes.
  • The country of residence the person designates on forms and documents.

None of these factors is dispositive by itself; however, that does not mean that some factors are not weighed more heavily than others.

Those people who would otherwise be characterized as resident aliens pursuant to the Substantial Presence Test, who think they qualify for the Closer Connection exception, can file Form 8840 with the I.R.S.

This brief overview of some important considerations associated with the substantial presence test and closer connection exception is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

Arizona Tax AttorneyDouglas K Cook is an Arizona tax attorney with over 40 years of experience as a practicing attorney. Although Douglas K Cook's office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.

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