Substantial Presence Test and 8833 Vs 8840 to bypass 1040 filing

Generally, all U.S. citizens and resident aliens are legally obliged to file 1040 and be taxed on their worldwide incomes. When we say resident aliens, they constitute taxpayers, who are Greencard holders or who meet Substantial Presence Test. Here we will discuss what Substantial Presence Test is and how taxpayers can avoid being subject to filing 1040 and pay taxes on their worldwide incomes IF this test is met.   SUBSTANTIAL PRESENCE TEST (SPT) Internal Revenue Service has laid down the formula to determine whether you meet the test or not, using your days of presence in the United States. To meet the test, both conditions below need to be satisfied.

• Be present in the United States for at least 31 days in current year and
• Be present in the United States for 183 days or more in total during current year and 2 preceding years. It is calculated as –

1. Current year days in the United States X 1                           …………… days
2. First preceding year days in the United States X 1/3         …………… days
3. Second preceding year days in the United States X 1/6    …………… days

If total of (A+B+C) equals or exceeds 183 days, you satisfy the above condition. DAYS OF PRESENCE IN THE UNITED STATES You are treated as present in U.S on any day you are physically present in the country. However, there are certain exceptions to this rule. Do not count following days as days of presence in the U.S for the purposes of this test:

• Days you commute to work in the U.S. from a residence in Canada or Mexico, if you regularly commute from Canada or Mexico.
• Days you are in the U.S. for less than 24 hours, when you are in transit between two places outside the United States.
• Days you are in the U.S. as a crew member of a foreign vessel.
• Days you are unable to leave the U.S. because of a medical condition that develops while you are in the United States.
• Days you are an exempt individual.

  WAYS TO AVOID 1040 FILING REQUIREMENT IF SPT IS MET File Form 8833 (Treaty-Based Return Position) A taxpayer may file Form 8833 and now return form will be Form 1040NR on which only U.S. sourced income will be reported. Form 8833 cannot be separately filed and needs to be attached with Form 1040NR (even if there is no U.S. source income). However, a taxpayer will be liable for filing other informational returns viz. Form 3520/3520-A, Form 5471 and FBAR. File Form 8840 (Closer Connection Exception) This is a second alternative available to taxpayers. Form 8840 can be separately filed unless there is any U.S. source income which would necessitate 1040NR filing. In this filing, taxpayers do not need to file various informational returns as required under Form 8833 filing. However, you cannot file Form 8840 if any of the following apply-

• Presence in U.S. for 183 or more days in current calendar year itself.
• Possess Greencard.
• Applied for or have taken affirmative steps to apply for, a Greencard or have application pending to change your status to Greencard holder.