Bona Fide Residence, Physical Presence Test
In order to claim the Foreign Earned Income Exclusion - FEIE, you must meet the Bona Fide Residence Test or the Physical Presence Test. These IRS tests determine your residency status in a foreign country during the tax year.
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Review the sections below to learn more about the residence tests for the foreign income exclusion:
The main difference between the two tests is that the Physical Presence Test relies on the time spent out of the U.S. while the Bona Fide Residence Test looks more into your intentions and activities while out of the country.
KEY TAKEAWAYS
- To qualify for the Foreign Earned Income Exclusion (FEIE), you must pass either the Bona Fide Residence Test or the Physical Presence Test. These tests determine if you've spent enough time abroad to exclude foreign income from U.S. taxes.
- To meet the bona fide residence test, you need to be either a US citizen or resident who is also a citizen or national of another country that has a tax treaty with the United States. You must also have lived continuously in a foreign country for a full tax year.
- To pass the Physical Presence Test, you must be physically present in a foreign country for 330 full days within a 12-month period. The days don't need to be consecutive, but partial days don't count towards the total.
- You use Form 2555 to claim the FEIE under both tests. It requires detailed reporting of your foreign residency status; online tax filing platforms can help you accurately complete and e-file this form.
- If you can't meet the minimum time requirements due to unforeseen circumstances like war or civil unrest, you may still qualify under certain conditions.
Bona Fide Residence Test
You pass the Bona Fide Residence Test if you're a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (January 1 - December 31 for taxpayers who file their tax returns on a calendar-year basis). In addition, you must have established a residency in a foreign country. You can use the test to qualify for the foreign income exclusion and deduction.
A bona fide resident is an individual that is either:
Note that you don't automatically acquire bona fide resident status just by living in a foreign country or countries for one year.
Bona Fide Resident Status Qualifications
In order to determine if you meet the bona fide residence test in a foreign country, you must find out if you have established a residence in a foreign country. Your bona fide residence may not be the same as your domicile, which is your personal home or the place to which you always return or intend to return. The questions that the IRS uses to define bona fide residences are determined according to each individual case. It takes into account factors such as your intention or purpose of your trip and the nature and length of your stay abroad.
Related Read: Which Form 1040 should you use?
If you have foreign earned income under this, uses online tax software to file your return. Start and e-file with eFile.com; the app will select the and generate the proper forms for you when filing your next income tax return. The form completed for this is Form 2555, Foreign Earned Income, which shows under Part II that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year. This section is called the Taxpayers Qualifying Under Bona Fide Residence Test. Largely using the facts reported on Form 2555 eFileIT, the IRS decides whether you qualify as a bona fide resident (it cannot make this determination until the form is filed).
The easiest and quickest way to make this determination is through filing with eFile.com. It will generate and help complete the correct form(s) with 100% accuracy based on your entries.
Start Preparing Your Return with Form 2555
You are not considered a bona fide resident if your make a statement to a country's authorities that you're not a resident of that country. The authorities then determine that you're not subject to their income tax laws as a resident. If you have made this statement and the authorities haven't made a final decision of your status, you're not considered to be a bona fide resident of that foreign country.
Bona Fide Resident Status for Brief Trips
During the period of bona fide residence, you can leave the country for brief or temporary trips back to the U.S. or elsewhere for vacation or business purposes. To keep your status, you must have a clear intention of returning from such trips without reasonable delay to your foreign residence or to a new bona fide residence in another foreign country.
Bona Fide Resident Status If You Lived in a Foreign Country for Part of the Tax Year
If you have been a bona fide resident for part of the 2023 tax year, you will qualify as a bona fide resident for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. This qualification will be put in place once you have established bona fide residence in a foreign country for an uninterrupted period that includes the entire tax period. In addition, you could qualify as a bona fide resident for an entire tax year plus parts of one or two other tax years.
Physical Presence Test
You pass the physical presence test (applicable to both U.S. citizens and resident aliens from the U.S.) if you're physically present in a foreign country or countries for 330 full days during a 12-consecutive-month period. However, the 330 qualifying days don't have to be consecutive. You can count days you spent abroad for any reason (employment purposes, vacation time, etc.).
You do not meet the physical presence test if one of the followings situations applies:
- An illness, a vacation, an employer's orders, or family problems cause you to be present in a foreign country for less than the required amount of time.
- You're present in a foreign country in violation of U.S. law (income earned from a source within the foreign country for service performed during the period of violation doesn't qualify as foreign earned income).
The test is only based on how long you stay in a foreign country or countries. It doesn't depend on the kind of residence you establish, the nature and purpose of your stay abroad, or your intentions about returning to the United States. However, your intentions with regard to the purpose and nature of your stay abroad are relevant in determining whether you meet the tax home test.
You're not considered to have a tax home in a foreign country for any period during the tax year which your residence is in the U.S. However, being temporarily present in the U.S. or maintaining a home there doesn't necessarily mean that your home is in the United States.
How to Determine Your 12-Month Period Outside of the United States
Below are four rules to help you figure out your 12-month period:
- It can begin with any day of the month. The period will end the day before the same calendar day, 12 months later.
- It must be made up of consecutive months. Any 12-month period can be used if the 330 days in the foreign country fall within that period.
- You don't have to begin the period with your first full day in a foreign country or to end it the day you leave. You can choose the period that gives you the greatest exclusion.
- When determining whether the period falls within a longer stay in a foreign country, note that 12-month periods can overlap one another.
The IRS considers a full day a period of 24 consecutive hours, beginning at midnight. It advises that you must spend each of the 330 days in the foreign country. When you leave the U.S. to go directly to a foreign country or when you return directly to the U.S. from the foreign country, the time you spend over on international waters doesn't count towards the 330 days. However, if, in traveling from the U.S. to the foreign country, you pass over another foreign country before midnight of the day you leave, the first day you can count is the day following the day you left the U.S.
You can move about from one place to another in a foreign country or to another foreign country without losing full days, but if any part of your travel time is not within a foreign country or countries and takes 24 hours or more, you will lose full days. If you're in a transit between two points outside the U.S. and are physically present in the U.S. for less than 24 hours, you're not considered present in the U.S. during the transit. Instead, you're treated as traveling over areas not within any foreign country.
Minimum Time Requirement Waiver
The minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar, harmful conditions in that country. However, you must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. In addition, you must prove that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, that country on or before the beginning date of the waiver.
Your information to qualify for the physical presence test is reported on your return on Form 2555, Part III, Taxpayers Qualifying Under Physical Presence Test. When you prepare your return on eFile.com, we will calculate your qualification for the physical presence test for you and report it in your 2023 year return due by the April IRS tax deadline.
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