Substantial Presence Test (SPT) for NRIs: Guide to US Tax Residency Status

The IRS uses the Substantial Presence Test (SPT) to figure out if you qualify as a U.S. resident for tax purposes. This test applies to people who aren't U.S. citizens or permanent residents (Green Card holders).

The test works on a simple principle with two main requirements:

You must stay in the U.S. for at least 31 days during the current year
Your total presence must reach 183 days or more across three years

Formula for calculating presence

Your presence calculation uses a weighted formula that looks at three years. You'll need to add up:

Every day you spent in the current year
A third of your days from last year
A sixth of your days from two years ago

To cite an instance, let's say you stayed in the U.S. for 120 days each year for the last three years. Here's how it adds up:

Current year: 120 days × 1 = 120 days
Previous year: 120 days × 1/3 = 40 days
Two years ago: 120 days × 1/6 = 20 days Total: 180 days

This example shows you wouldn't meet the test's requirements because the total falls below 183 days. Your tax obligations change by a lot if you pass this test, as you'll become subject to U.S. tax on your worldwide income.

How the substantial presence test affects NRIs

Your tax residency status as an NRI determines your U.S. tax obligations. The substantial presence test affects your tax responsibilities in several key ways:

Your worldwide income becomes subject to U.S. taxation
You must report foreign bank accounts and assets
You need to file Form 1040 instead of Form 1040NR
Your tax treaty benefits might change

Here's an example that shows how the test works: If you stayed in the U.S. for 170 days in 2023, 30 days in 2022, and 24 days in 2021, your calculation would be:

2023: 170 days (all days counted)
2022: 10 days (30 ÷ 3)
2021: 4 days (24 ÷ 6) Total: 184 days

The IRS treats you as a resident alien for the entire tax year once you meet the substantial presence test. Your residency start date becomes the first day you were physically present in the U.S. during that calendar year.

You might still qualify for certain exceptions after meeting the test. The "closer connection" exception stands out as the most common option if you:

Managed to keep a tax home in a foreign country
Had stronger ties to that country than to the U.S.
Were present in the U.S. for less than 183 days in the current year

It's worth mentioning that your residential status significantly impacts your tax liability, reporting requirements, and eligible deductions.

Exceptions and exemptions in the substantial presence test

Several groups of people can qualify for exemptions from the substantial presence test. The IRS lists specific groups as "exempt individuals," but this doesn't mean they're free from U.S. tax.

Your time in the U.S. won't count toward the substantial presence test if you belong to these groups:

Students with F-1, J-1, M, or Q visas (exempt for 5 calendar years)
Faculty and researchers with J-1 or Q visas (exempt for 2 years in the last 6 calendar years)
Professional athletes who take part in charitable sporting events
Government officials with A or G visas

You need to file Form 8843 to claim these exemptions. The timing matters - you can't exclude your days of presence if you miss the form's due date.

The "closer connection" exception gives you another way to avoid U.S. tax residency. This might work for you if you have stronger ties to a foreign country and spend less than 183 days in the current year in the U.S. You'll need detailed documentation to show your closer connection through factors like:

Your permanent home's location
Your family's residence
Where you keep your personal belongings
Your social and cultural connections

You must file Form 8840 with the IRS to claim the closer connection exception.

Planning tax residency for NRIs

Tax planning plays a significant role when you prepare to change your residency status. The Resident but Not Ordinarily Resident (RNOR) status can give you great tax advantages for up to three financial years after your return to India.

Smart planning helps you optimize your tax obligations in both countries. Your tax strategy should include these vital points:

Keep detailed records of days you're physically present
Sell foreign assets during your RNOR status period
Check applicable Double Taxation Avoidance Agreements (DTAA)
Monitor your foreign income sources
Time your return to get maximum benefits

Returning to India before December 31 qualifies you for RNOR status for one financial year. You can extend this RNOR status to two financial years by delaying your return until March 31.

Note that your global income becomes taxable in India once your status changes to Resident and Ordinarily Resident (ROR). You must also report all your foreign accounts and assets in India's tax returns.

Remember to factor Tax Deducted at Source (TDS) regulations in your financial planning. Non-compliance with NRI TDS requirements could lead to penalties. Managing taxes across countries needs effort and expertise, but good planning helps you stay compliant while optimizing your tax position.

How to prepare for substantial presence test filings

The substantial presence test filings need proper documentation and accurate reporting. Meeting the test criteria will change your tax filing obligations by a lot.

You must file Form 1040 to report your worldwide income once you qualify as a U.S. tax resident. You'll need these important documents:

Immigration status records and visa documentation
Records of days present in the United States
Documentation of any medical conditions that affected your stay
Evidence of tax home in foreign country (if applicable)

We tracked U.S. presence carefully with all entry and exit dates. Detailed travel records are vital to calculate everything correctly.

Tax treaty implications play a big role in your filing preparation. A tax treaty between your country and the U.S. might require you to file Form 8833 for treaty benefits.

Your FBAR and FATCA requirements extend to foreign financial accounts. These forms become mandatory with foreign bank accounts or investments. Missing these reporting requirements can lead to heavy penalties.

File Form 8843 if you want exemptions from the substantial presence test due to your visa status or medical conditions. Submit this form by the tax return due date, even without filing an income tax return.

Process of SPT

The substantial presence test follows a straightforward evaluation process. You need to check your physical presence in the United States through a two-part evaluation.

Let's break down how to determine your tax residency status:

Count your days in the current year
- Check if you meet the 31-day minimum requirement
- Count partial days as full days
- Keep track of exempt days
Calculate the three-year total
- Current year: Add all days
- First preceding year: Divide total days by 3
- Second preceding year: Divide total days by 6

We tracked days that don't count toward your presence, such as:

Transit time under 24 hours
Daily commutes from Canada or Mexico when you do this for more than 75% of workdays
Days you couldn't leave due to medical conditions

The IRS will count you present in the U.S. when you spend any part of a day in:

All 50 states and District of Columbia
U.S. territorial waters
Adjacent submarine areas under U.S. control

Good record-keeping is vital throughout this process. The IRS needs you to maintain records of your presence dates and qualifying exemptions. Your tax obligations start from your first day of presence in that calendar year once your calculations show resident status.

Documents required from NRIs for SPT

Good documentation is the foundation of your substantial presence test filing. The right paperwork will give a complete and accurate coverage that meets IRS requirements.

You need these basic documents to file your SPT:

Form W-2 (Wage and Tax Statement from your employer)
Form 1099 (Reports of other income like dividends and interest)
Foreign Bank Account Report (FBAR) for accounts exceeding $10,000
Form 8938 (Statement of Specified Foreign Financial Assets)
Passport and current visa documentation
Indian Income Tax Return (ITR) showing foreign earnings
Investment statements for U.S.-based assets
Proof of income from abroad, namely paystubs or salary slips

You'll need either an Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN). Keeping accurate records of your presence days helps confirm your tax residency status.

Not reporting foreign accounts can lead to hefty penalties that could reach 100% of your account values. The IRS enforces offshore compliance strictly, so proper documentation is vital to avoid fines and criminal investigations.

Frequently Asked Questions (FAQs): Substantial Presence Test

How is the Substantial Presence Test calculated?

The Substantial Presence Test is calculated using a weighted formula over three years. You must be physically present in the U.S. for at least 31 days in the current year and 183 days or more over a three-year period, counting all days in the current year, one-third of the days from the previous year, and one-sixth of the days from two years ago.

What are the consequences of meeting the Substantial Presence Test?

If you meet the Substantial Presence Test, you're considered a U.S. tax resident for the entire tax year. This means your worldwide income becomes subject to U.S. taxation, you must report foreign bank accounts and assets, and you'll need to file Form 1040 instead of Form 1040NR.

Are there any exemptions from the Substantial Presence Test?

Yes, certain individuals are exempt from the Substantial Presence Test. These include students with F-1, J-1, M, or Q visas (exempt for 5 calendar years), faculty and researchers with J-1 or Q visas (exempt for 2 years within the past 6 calendar years), professional athletes participating in charitable sporting events, and government officials with A or G visas.

What is the "closer connection" exception?

The "closer connection" exception allows you to avoid U.S. tax residency even if you meet the Substantial Presence Test. To qualify, you must maintain stronger ties to a foreign country, spend less than 183 days in the current year in the U.S., and demonstrate factors such as the location of your permanent home, where your family resides, and your social and cultural affiliations.

What documents are required for Substantial Presence Test filings?

Essential documents for Substantial Presence Test filings include Form W-2, Form 1099, Foreign Bank Account Report (FBAR), Form 8938, passport and current visa documentation, Indian Income Tax Return showing foreign earnings, investment statements for U.S.-based assets, and proof of income from abroad. You'll also need either an Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN).