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Substantial Presence Test Exceptions | Minneapolis Minnesota International Tax Lawyer

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In a previous article, I discussed in detail the Substantial Presence Test and I mentioned that there are a number of exceptions to the Test. This means that, even though a person met the requirements of the substantial presence test, he can still avoid the resident alien status for US income tax purposes based on a specific exception.  In this brief essay, I will summarize these Substantial Present Test exceptions.

Substantial Presence Test Exceptions: Closer Connection

The first set of exceptions includes the Closer Connection Exception and the Tax Treaty Exception.  Let’s deal with each one separately.

Under the Closer Connection Exception, an individual who meets the requirements of the Substantial Presence Test is able to escape being a US tax resident for income tax purposes if he can demonstrate a “closer connection” to a foreign country.

In another article, I detail all of the requirements of the Closer Connection Exception.  Here I would like to restate the main requirements under IRC § 7701(b)(3)(B) and Treas. Reg. § 301.7701(b)-2(a):

1.The individual must be present in the United States for fewer than 183 days in the current calendar year;

2.The individual must maintain a tax home in a foreign country during the year;

3.The individual must have a closer connection to that foreign country than to the United States; and

4. An individual must be an eligible individual.

Substantial Presence Test Exceptions: Tax Treaty Exception

The Tax Treaty Exception is very similar to the Closer Connection Exception, but it is based on a completely different concept – the tie-breaker rules of a tax treaty.

 IRC §7701(b)(6) and Treas. Reg. §301.7701(b)-7 provide that an individual who meets the substantial presence test but is a resident of a treaty country under a tie-breaker provision of an income tax treaty may elect to be treated as a nonresident alien for US income tax purposes. This individual will need to make an election on Form 8833, Treaty-Based Return Position Disclosure.

Substantial Presence Test Exceptions: Eight Categories of Exempt Individuals

While the Closer Connection and the Tax Treaty Exceptions deal with someone who actually met the Substantial Presence Test and is trying to escape the its consequences, the second set of exceptions exempts the days spent in the United States from the consideration of the Substantial Presence Test so that the exempt individual never meets the Substantial Presence Test.  This is a very important distinction, because it may greatly affect one’s obligations concerning US international information returns.

Here is a list of categories of exempt persons:

Foreign government-related individuals and their immediate family (26 USC §7701(b)(5)(B))

Teachers and trainees and their immediate family (26 USC §7701(b)(5)(C))

Foreign students on F-, J-, M- or Q-visas (26 USC §7701(b)(5)(D))

Professional athletes temporarily in the US for charitable sporting events (26 USC §7701(b)(5)(A)(iv))

Individuals unable to leave the US due to medical conditions (26 USC §7701(b)(3)(D)(ii))

commuters from Canada and Mexico 26 USC §§7701(b)(7)(B)

foreign vessel crew members 7701(b)(7)(D) and

and persons who travel between two foreign countries with a less than a 24-hour layover in the United States 7701(b)(7)(C)

Substantial Presence Test Exceptions: Note on the Professional Athletes Exception

The “professional athletes who are temporarily present in the United States to compete in a charitable sporting event” category  has very specific requirements for the sport events in order for exemption to apply.  First, the sports event must be organized primarily to benefit §503(c)(3) tax-exempt organization. Second, the net proceeds from the event must be contributed to the benefitted tax-exempt organization. Finally, the event must be carried out substantially by volunteers.

Substantial Presence Test Exceptions: Note on the Medical Condition Exception

Concerning the last category “foreign aliens who are unable to leave the United States because of a medical condition”, Rev. Proc. 2020-20 expanded this medical condition exception to include “COVID-19 Medical Condition Travel Exception” for eligible individuals unable to leave United States during “COVID-19 Emergency Period”. The term COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the United States on each day. An Eligible Individual may claim the COVID-19 Medical Condition Travel Exception in addition to, or instead of, claiming other exceptions from the substantial presence test for which the individual is eligible.

Substantial Presence Test Exceptions: Eligibility is on Day-by-Day Basis

The eligibility for any particular exception is determined on a day-by-day basis. If an alien ceases to qualify for any of these exceptions because of a change in circumstances but remains in the United States, he must count the days present in the United States for the purposes of the substantial presence.  The count must start from the very day that he no longer qualifies for the exception.

Substantial Presence Test Exceptions: Immediate Family

Immediate family can be derivatively eligible for a substantial present test exception only for the following categories: foreign government-related individual, a teacher or trainee (J-visa or Q-visa holder) and a student (F-visa or M-visa holder).  The family of the individuals in the other five categories may only claim an exception based on their own particular facts and circumstances.

Contact Sherayzen Law Office for Professional Help with US International Tax Law

US international tax law is incredibly complex.  This is why you need to contact Sherayzen Law Office for professional help.  Sherayzen Law Office is a highly-experienced leader in US international tax compliance that stands out for its ability to navigate complex international tax issues with creativity, precision and depth.

Contact Us Today to Schedule Your Confidential Consultation!

2025 Foreign Earned Income Exclusion | International Tax Lawyer & Attorney

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The Foreign Earned Income Exclusion (“FEIE”) is a valuable tax strategy available to US tax residents who live and work abroad. It allows US citizens to exclude a certain amount of foreign earned income from their US taxable income. The IRS adjusts the precise amount every year.  In this article, I will discuss the 2025 Foreign Earned Income Exclusion.

2025 Foreign Earned Income Exclusion: Background Information

FEIE was born out of the fact that the US tax system is unique and taxes its citizens and even more broadly its residents on their worldwide income irrespective of where they reside. In many countries, such taxpayers are subject to local foreign income taxes on the same income. In order to alleviate the potential burden of double taxation, the US Congress enacted Section 911 of the Internal Revenue Code. This section codified FEIE.

Section 911 allows qualifying individuals to exclude a specified amount of foreign earned income from US taxable income. The IRS adjusts this amount every single year.  A taxpayer must use Form 2555 to claim FEIE.

2025 Foreign Earned Income Exclusion: Eligibility

In order to claim FEIE, a taxpayer must meet certain requirements set forth in IRC §911. I will provide only a brief outline of these requirements in this article. They are discussed in more detail in other articles on our website.

First of all, FEIE applies only to foreign earned income, not passive income and not US-source income.

Second, the taxpayer must maintain his tax home in a foreign country. “Tax Home” is a term of art that has its specific meaning.

Third, you must pass either the physical presence test or the bona fide residence test.

2025 Foreign Earned Income Exclusion: Additional Considerations

While FEIE brings a huge benefit of income exclusion, it often is not the best option for US taxpayers who reside overseas. Let’s focus on the four most important considerations.

First, FEIE limits and in some cases completely eliminates the ability to take Foreign Tax Credit (“FTC”). If you use FEIE, you cannot use the FTC to reduce US taxes on income already excluded under the FEIE.  The problem arises when FTC is actually higher than the US tax.  In this case, you may be losing a very important tax strategy to reduce your US taxes not only in the current year, but also in the future.

Second, FEIE may result in ineligibility to take other tax credits normally available to a taxpayer.

Third, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion).

Finally, while not a tax consideration, usage of FEIE by US permanent residents may result in the abandonment of their green card. In other words, FEIE may present a huge risk to the immigration goals of a taxpayer.

2025 Foreign Earned Income Exclusion: Adjustment for 2025

On October 22, 2024, the IRS announced that the foreign earned income exclusion amount under §911(b)(2)(D)(i) is going to be $130,000 for the tax year 2025. This is up from $126,500 in the tax year 2024.

Contact Sherayzen Law Office for Professional Help with Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is a vital tax tool for US taxpayers working abroad, but it must be used cautiously and after careful consideration of all circumstances.  Hence, if you are a US taxpayer who lives abroad or you are planning to accept a job overseas, you need to secure the help of Sherayzen Law Office, a premier firm in US international tax compliance. We can help you navigate the complexities of FEIE, determine your eligibility for it and build a tax strategy to help you maximize the advantages offered by the Internal Revenue Code.

Contact Us Today to Schedule Your Confidential Consultation!