The Bona Fide Residence test vs. The Physical Presence test
Updated: Nov 3
The foreign earned income exclusion allows qualifying U.S. citizens and resident aliens to exclude a certain amount of foreign earned income from U.S. taxation. However, eligibility for this exclusion hinges on passing one of two residency tests: the Bona Fide Residence Test or the Physical Presence Test. This article delves into the specifics of these tests, offering clarity for expatriates navigating the often convoluted realm of tax obligations.
The Bona Fide Residence Test
The Bona Fide Residence Test evaluates whether a U.S. citizen or resident alien has established a genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. Key factors include:
Intention of the resident: Establishing bona fide residence is not merely a matter of physical presence but involves demonstrating a genuine intention to reside in the foreign country.
Length and nature of stay: Temporary absences from the foreign country may not disqualify you, but a long-term connection with the country is essential.
Tax home: Your tax home must be in a foreign country throughout your period of bona fide residence.
The Physical Presence Test
Conversely, the Physical Presence Test is more quantitative. It requires that the individual be physically present in a foreign country for at least 330 full days during any consecutive 12-month period. Important points include:
The 330 full days need not be consecutive.
The test is based purely on the physical presence, not the individual's intent or purpose of stay.
Example of Qualifying via the Bona Fide Residence Test
Jessica moved to Paris, intending to make it her permanent residence. She embraced life in France, renting a local apartment, enrolling her children in a Parisian school, and engaging deeply with the community. Her life was firmly rooted in Paris, demonstrating a clear intention to establish a bona fide residence. Despite her strong ties to France, Jessica's habit of making frequent trips back to the United States for business meetings and family visits could jeopardize her standing in the Physical Presence Test. Although her commitment to residing in Paris is evident, failing to meet the 330 full-day requirement in a foreign country due to her travels means she might not qualify for the FEIE under the Physical Presence criteria.
Example of Qualifying via the Physical Presence Test
In contrast, consider Michael, a marine engineer who spent 335 days working on international waters, only returning to his home in the U.S. for a month between contracts. Michael's situation aligns with the Physical Presence Test requirements. He was physically present in a foreign country (or countries) for more than 330 full days within a consecutive 12-month period, making him eligible for the FEIE under this criterion. However, Michael's transient lifestyle, with no established residence in any single foreign country and his return to the U.S. after his work stints, means he wouldn't satisfy the Bona Fide Residence Test. His stay overseas was substantial in terms of length but not in terms of establishing a settled, long-term residence abroad.
Bona Fide Residence Test
Physical Presence Test
You're a bona fide resident of a foreign country if you reside in it for an uninterrupted period that includes an entire tax year.
You must be physically present in a foreign country for 330 full days during a period of 12 consecutive months.
Must cover a full U.S. tax year (January 1 – December 31).
Can be any 330 full days, not necessarily consecutive, in a 12-month period.
Less flexible. Moving back to the U.S. during the year could invalidate your status.
More flexible. Allows for breaks during the stay as long as the 330-day requirement is met.
Requires you to establish that you have not planned to return to the U.S. and have made a home in the foreign country.
No need to establish intent to remain abroad.
Fewer restrictions on travels to the U.S., but maintaining foreign residence is crucial.
Travel to the U.S. can affect the 330-day threshold.
Requires proof of integration into the local community, tax home, and the nature of the stay.
Requires meticulous records of your travels, including dates you entered and left the foreign country.
Equating Long-Term Travel with Bona Fide Residence: Many individuals mistakenly believe that an extended stay in a foreign country automatically establishes them as bona fide residents for tax purposes. However, the IRS criteria for determining bona fide residence are multifaceted. It's not solely about length of stay; the nature of your stay and your demonstrated intent to reside indefinitely in the foreign country are crucial. For instance, taking a sabbatical year to travel across Europe while maintaining significant ties in the U.S. does not qualify you as a bona fide resident in any of the countries visited.
Assuming Short Visits to the U.S. Nullify Physical Presence: Another common misconception is that any short return to the U.S., perhaps for holidays or brief work trips, will immediately disqualify expatriates from meeting the Physical Presence Test. The truth is, the test allows brief visits to the U.S. as it requires 330 full days in a foreign country within a 12-month period, not a calendar year. However, individuals need to meticulously track these days, as exceeding the allotted time in the U.S. could indeed invalidate their eligibility.
Document meticulously: Keep detailed records of your travels, tax home, and residential ties.
Understand your situation: Each test has unique criteria; assess which is more applicable to your circumstances.
Seek professional guidance: Given the stakes and complexities involved, consulting with tax professionals, particularly those specializing in expat tax law, is prudent.
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