New policies recently rendered state, non-US citizens turn taxpayers depending on the time they have lived in the US.

It is observed that this taxation in borne by non-US citizens visiting family in the states and staying for a few months each year. Due to Covid restrictions, medical or other reasons, visitors might have been forced to extend their stay. This could result in a person, accidentally fulfilling the ’substantial presence’ period to get caught up in the tax payment policy set for residency.

“Non-US person” may end-up paying US Tax on Worldwide Income and providing US Tax Reporting

New policies recently rendered state, non-US citizens turn taxpayers depending on the time they have lived in the US.

It is observed that this taxation in borne by non-US citizens visiting family in the states and staying for a few months each year. Due to Covid restrictions, medical or other reasons, visitors might have been forced to extend their stay. This could result in a person, accidentally fulfilling the ’substantial presence’ period to get caught up in the tax payment policy set for residency.

Substantial Presence Test is conducted by the US’s Internal Revenue Service to identify individuals who are non-US residents yet eligible to pay tax. The criteria for this is, if a person is physically present in the USA for 183 days or more, they are treated as US residents for income tax purposes.

In addition, if someone is present for a minimum of 31 days during the current calendar year,  plus one-third of the days they were present in the preceding calendar year and one-sixth of the days they were present in the second preceding calendar year equals t or is more than 183, then the person qualifies for the “Substantial Presence Test” (SPT).

This is an important test and a key distinction to keep in mind is that US tax residents pay taxes on their worldwide income and are subjected to a credit on foreign taxes paid. On the other hand, Persons who are not US residents are taxed only on their US sources of income. This could be daunting for people who qualify as US tax residents by accident.

If one is looking to avoid falling under this policy, a seasonal visitor must keep their visits fewer than 121 days each year.

One also has the option of taking these tests to be exempt from the SPT –

  1. The Closer Connection Test
  2. The Exempt Individual Test
  3. The Treaty Tie-Breaker Tests

Add to this, US Tax residents should meet the complex tax reporting requirements on their foreign assets. This includes –

  1. Foreign Bank Account Reports (FinCEN Form 114) that details foreign bank accounts
  2. Specified Foreign Financial Assets (Form 8939)
  3. Controlled Foreign Corporations (Form 5471)
  4. Other required reporting forms
Penalties can be levied on failure to fill these forms and returns can be hefty, but they can be struck-off, if the taxpayer has a reasonable cause for not filing. An accidental tuning into a US tax resident could expose you to paying a state income tax. As an example, a person who spends the required number of days in New York will have to pay New York an income tax on their worldwide income.

4i Advisory has years of experience of expertise in delivering Direct Tax, Private Equity, Accounting, Assurance, US-India Tax and Payroll services. Reach to our expert today – Urvesh Patel (urvesh.patel@4iadvisory.com).

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