Substantial Presence Test Explained: How NRIs Determine US Tax Residency?

Do you know how your US tax residency is determined when you are living or working in the USA on a visa? Well, depends on your visa type and how much time you have lived in the country. In this, the US Substantial Presence Test (SPT) plays a key role in determining whether you are a resident or non-resident alien for tax purposes in the country.

Now, you must be thinking, why does this even matter? Your tax status in the US affects your tax obligations, the tax deductions and credits you are eligible for, and whether you need to pay tax on your global income in the US. Additionally, it also impacts your Indian tax obligations.

Want to know more about the substantial presence test? This blog provides you with a clear and detailed idea of SPT, along with its eligibility criteria, implications, and how it applies to an NRI. So read on and gather all the information.

What is the Substantial Presence Test (SPT)?

The IRS Substantial Presence Test (SPT) is used to identify if a non-resident alien in the US qualifies as a resident alien for tax purposes based on the number of days they have lived in the country over 3 years. The test is for people who are not US citizens or permanent residents (green card holders).

If you fulfill the SPT criteria, then you are liable to pay tax in the US as a resident. It means your global income becomes taxable in the country. However, if you do not meet the test criteria, you are considered a non-resident alien and pay tax on your US-source income only.

In simple terms, SPT is a way to determine your tax status in the US based on the number of days you were physically present in the country over the past three years. Now, moving ahead, let's know how to calculate the substantial presence test.

How to Calculate the Substantial Presence Test?

The Substantial Presence Test works on a simple principle with two key requirements:

• You were physically present in the country for at least 31 days in the current year
• Your total presence in the country was 183 days or more in the last three years

Considering this, the IRS weighs each year differently:

The formula to calculate the substantial presence test is: (Current year days x 1) + (Prior year days x 1/3) + (Year before prior year days x 1/6) ≥ 183.

This is how the substantial presence test is calculated. Now, moving further, let's know the days that count towards the test.

Which Days Count Toward the Substantial Presence Test?

You are treated as physically present in the US at any time during the day, including arrival and departure days. Considering this, arriving at 11:59 p.m. counts as a full day for the substantial presence test. The following days are excluded from the SPT:

• Days you regularly commute to work in the US from Mexico or Canada.
• Days when you were less than 24 hours in the USA while in transit between two places outside the country.
• Days when you were unable to leave the US because of the medical condition that developed while you were staying there.
• Days you were working in the US as a crew member on a foreign vessel.
• Days when you were an "exempt individual."

Furthermore, the IRS SPT definition includes all 50 states of the country, the US territorial waters, the District of Columbia, and adjacent seabed areas where the country has mineral rights. It does not include US territories, such as US airspace or Puerto Rico. 

So, these are the days that count toward the substantial presence test. Now, moving forward, how does this test affect NRIs?

How the Substantial Presence Test Affects NRIs?

As an NRI, your IRS tax residency status in the US determines your tax obligations there. Considering this, if you meet the substantial presence test, here is how your tax responsibilities in the US are affected:

• You are liable to pay tax on your global income in the US, including your Indian income
• You need to report your Indian and foreign bank accounts and assets
• Instead of Form 1040-NR, you need to fill out Form 1040
• Your tax treaty benefits in the country may change.

For instance, if you stayed in the US for 170 days in 2026, 30 days in 2025, and 24 days in 2024, the SPT calculation would be:

• 2026: 170 days (all days counted)
• 2025: 10 days (30/3)
• 2024: 4 days (24/6)

The total number of days you spent in the US over the past three years is 184 days. Here, you meet the test requirements. Considering this, for the entire tax year, the IRS will treat you as a resident alien. In simple terms, your Residential status in the US or any other country significantly impacts your tax obligations, reporting requirements, and eligible tax deductions.

So, this is how the substantial presence test affects NRIs. Moving ahead, let's know the exceptions and exemptions to the test.

Exceptions and Exemptions to the Substantial Presence Test

The term "exempt individual" refers to individuals whose stay duration does not count for the substantial presence test. However, it does not mean they are exempt from paying taxes in the US. It means their physical presence days for the test are excluded from the calculation. This includes:

• F, J, M, or Q Visa Holders: Students on these visas are exempt from SPT for up to five calendar years. For instance, if you are on an F-1 visa for any part of the calendar year, the entire year is included in your five-year exemption, even if you only arrived in the country in December. Additionally, the five-year exemption limit is a lifetime limit, not per degree or visa. Considering this, if you were in the country on an F-1 visa for two years and returned to your home country, and then moved back to the US after some time on another F-1 visa, you would only have three exempt years.
• J or Q Teacher/Trainee Visa Holders: Teachers and trainees are exempt from the substantial presence test for any two calendar years of the preceding six years. After completion of the two years, their subsequent years count toward the test.
• Foreign Government-Related Individuals (A or G Visas): Consular officials, diplomats, and certain global organization employees on A or G visas are exempt from SPT for the entire time they hold these visas. It does not include A-3 and G-5 visa holders. Additionally, professional athletes who take part in charitable sporting events. 

Further to claim these exemptions, you need to file Form 8843. Now, let's know about the exceptions in the substantial presence test.

Closer Connection Exception in the Substantial Presence Test

The "closer connection" exception is another way you can avoid US tax residency. This might work in your favor if you have a stronger connection to a foreign country. Additionally, you stayed in the US for less than 183 days in the current year. Considering this, you show a closer connection to the foreign country, you need to provide the following documents:

• Location of your permanent home
• Residence of your family
• Your social and cultural connections
• Where you keep your personal belongings

Apart from this, to claim the closer connection exception, you need to fill out Form 8840.

This was all about exceptions and exemptions in the substantial presence test. Moving further, let's know the tax filing requirements after meeting the test.

Tax Filing Requirements After Meeting the SPT

Once you meet the substantial presence test requirement, you need to understand your tax residency status in the US and the responsibilities associated with it. Here is what you should do:

• File a US Income Tax Return: Transitioning from a non-resident alien to a US tax resident means changes in your ITR filing requirements. Being a tax resident in the US, you are now liable to report your global income on Form 1040. Resident aliens fill out this form.
• Understand and Use Tax Treaties: If your home country has a tax treaty with the US, like the India-US DTAA, it may help you avoid double taxation on the same income in these two countries. Additionally, it can also help you in claiming tax exemption or reducing your tax liability.
• Report FBAR & FATCA: Meeting the test also changes your reporting requirements. Considering this, if you hold an Indian/ foreign bank account, assets, or investments and they are more than the stated threshold, i.e., $10,000. In this scenario, you need to report them through FBAR (Foreign Bank Account Report) and the FATCA (Foreign Account Tax Compliance Act) forms. It ensures compliance with both US and global tax laws.
• Comply with All Applicable Tax Obligations: Being a tax resident in the US, you need to follow both US and international tax laws. It includes reporting your global income accurately and paying applicable due taxes.

Remember, failing to meet these tax requirements might result in significant fines and penalties. Now, moving forward, let's know how NRIs can avoid US tax residency.

Planning US Tax Residency for NRIs

NRIs can avoid US tax residency by planning their stay in the country. The substantial presence test provides you with a mathematical formula through which you can plan your stay. Here is how you can do so:

• Track Your Days in Real Time: Count your physical presence in the US from January 1 each year. For calculation, do not wait until December, as by then it might be too late.
• Use Prior-Year Days in Your Future Planning: If in the last two years, you have spent significant time in the US, then each year you start with weighted days already, counting towards the test. Consider this when you are planning to stay in the country in the current year.
• Stay Below 183 Actual Days if Possible: Even if your weighted days count approaches 183 days in the current year, try to stay below 183 actual days in the US. It helps you to claim the closer connection exception.
• File Form 8840: If your weighted days reached 183 but actual days are less than that, file Form 8840. It helps you claim a closer connection exemption and avoid US tax residency.
• Consider SPT when Accepting Extended US Projects: A three-month extended project can cross a threshold and change your tax status for the entire year in the US.

This is how NRIs can plan their US stay while avoiding the SPT. Moving ahead, let's know the common mistakes made by them when applying the test.

Common Mistakes NRIs Make When Applying the SPT

Common mistakes that NRIs make when applying the SPT include:

• Counting Exempt Days as an F-1 Visa Holder: Many students use the SPT formula without removing the exempt days when they were on an F-1 visa in the US. It further classifies them as a resident alien.
• Not Counting Partial Days: Many NRIs only count the days when they were physically present in the US for 24 hours. Know that the IRS counts each calendar day you were physically present in the country, even if only for a few hours.
• Confusing the SPT with the Residential Test of India: Like the US, for tax purposes, India also has its own residential status formula based on days. These two tests are completely independent, and you can be a tax resident in both countries in the same year. So do not get confused over this and plan your stays accordingly.
• Assuming all Visa Types Determine Tax Status: Holding an H-1B visa does not automatically make you a resident alien or a non-resident alien for U.S. tax purposes. Additionally, an F-1 visa does not make you a non-resident alien permanently in the US. Your residential status is determined by the number of days you have stayed in the US.
• Missing the Form 8840 Deadline: You should claim the closer connection exemption by filing the Form 8840 on time. Once the deadline passes, there is no retroactive filing option in this.
• Not Accounting for the Transition Year: The year your visa type switches from an exempt visa to a non-exempt one is the year most people file their taxes incorrectly. 
• Not Seeking Expert Advice: If your day count is close to SPT or you have received a US project that significantly extends your stay in the country, consult a US tax advisor. The cost of advice is less than the cost of unexpected US global income tax filing obligations.

Avoid the above-mentioned mistake and plan your days to avoid a substantial presence test.

Final Thoughts

Lastly, to ensure tax compliance, understanding the substantial presence test is vital for NRIs in the U.S. You can avoid this by tracking your US days throughout the year, applying for the three-year weighted formula, and understanding the exempted days.

Further, the calculation of the test may look straightforward, but getting it incorrect can cost you thousands of penalties. If you are not sure about your residential status in the US, Savetaxs can help you determine it and fulfil your US tax obligations on time.