When Does a U.S. "Nonresident" Need to File a U.S. Tax Return or Report?
Well, the simple answer is that you might be more of a U.S. resident than you think.
There is an extremely arcane and convoluted process to determining U.S. tax residency for income tax purposes called the “substantial presence test.”
A quick refresher - the formula for determining substantial presence in the U.S. (which is the key to determining income tax residency) is as follows:
100% of days in the current year (so, for example, if you are trying to figure out residency for 2021, this would be all your days spent in the U.S. in 2021).
33.3% of days in the year before current year (going back to our 2021 example, this would be 1/3rd of your 2020 days spent in the U.S.).
16.6% of days two year before the current year (using 2021 as current year, this would be 1/6th of your 2019 days spent in the U.S.).
Many people use six months or 183 days as the bright line test for U.S. tax residency, which just isn’t the case (with one important caveat, see below). The reason this can cause issues is because, for example, a person who aspires to be a nonresident but who spends an average of 180 days in the U.S. per year actually has 270 days of U.S. presence based on the real test. Perhaps even more daunting is the fact that someone who spends an average of 122 days a year or more will also be considered a U.S. tax resident. Take that in for a second - 122 days is just over four months.
If you want to confirm this math, check out Internal Revenue Code Sect 7701(b)(3) or IRS Publication 519 under “Substantial Presence Test”. You can also check out your own U.S. day counts at the Department of Homeland Security website at dhs.gov.
The first year you trip substantial presence, you may be required to file a U.S. tax return as a “dual-status” taxpayer. Note, this would only apply to persons who are not U.S. citizens or lawful permanent residents (Green Card holders). As a reminder and PSA, U.S. citizens and Green Card holders are obligated to file U.S. tax returns every year whether they continue to reside in the U.S., or not.
One important caveat: If you are not present in the U.S. for 183 days or more, but meet substantial presence because of your days in the last two years (one-third and one-sixth, respectively), you can likely file Form 8840 to claim a closer connection to your country of residence (you will have to show that you have a physical home outside of the U.S. at a minimum). This form essentially inventories the location of all your income, properties, licensures, and social connections to determine if you can file a U.S. tax return as a nonresident (Form 1040NR). Note, in order to file the Form 8840, you will still need to attach it to a Form 1040-NR and report any U.S.-source income (a topic we will cover here at a later time).
For residents of treaty countries such as Canada and Australia, there is also potential treaty relief from residency rules, which can be claimed by filing Form 8833.
In short, nothing should be taken for granted about U.S. tax residency. Even if you can get relief from filing closer connection to another country with Form 8840 or under a U.S. tax treaty with Form 8833, you still may have information returns or reports to file if you trigger substantial presence.