US Expat Tax Planning: Bona Fide Residence or Physical Presence Test for FEIE?
Updated: Mar 19
Why wouldn't any American expat want to lower their US tax liability while traveling and living abroad?
A U.S. resident alien is generally taxed by the United States on worldwide income, just like a U.S. citizen. A U.S. citizen or resident alien who earns income in a foreign country may also be taxed on that income by the foreign host country, which can lead to double taxation. Several internal revenue code provisions are intended to help mitigate this situation, including the foreign earned income exclusion and the housing exclusion or deduction.
To qualify for these tax benefits, a taxpayer must:
have a tax home in a foreign country,
have foreign earned income, and
be a U.S. citizen or a resident alien who meets the bona fide residence test or the physical presence test in a foreign country.
A tax home is generally the taxpayer’s regular place of business or employment. If the individual has more than one regular place of business, then the tax home is located at his or her principal place of business or employment. If the individual has no principal place of business because of the nature of the business, or because the individual is not engaged in a trade or business, his or her tax home is at the individual’s regular place of abode. The location of the abode is based on where the taxpayer maintains their family, economic and personal ties.
A foreign country includes any territory under the sovereignty of a government other than that of the United States. This excludes international waters and airspace above them, Antarctica or U.S. territories such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and American Samoa. The days spent in the excluded area listed above does not count as days in a foreign country.
Bona Fide Residence Test
To meet this test, an individual must be:
(1) A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year ((e.g., January 1 through December 31, for calendar-year taxpayers), or
(2) A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, (e.g., January 1 through December 31, for calendar-year taxpayers)
During the period of bona fide residence in a foreign country, the taxpayers can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. However, to keep their status as a bona fide resident of a foreign country, they must have a clear intention of returning from such trips, without unreasonable delay, to their foreign residence or to a new bona fide residence in another foreign country.
The determination of a bona fide resident is based on all the facts and circumstances. The Courts have considered the length of stay plus additional factors such as:
a taxpayer’s intention,
establishment of a home in a foreign country,
participation in social and cultural activities in a foreign community,
nature and duration of employment, and
reasons for temporary absences from the foreign home.
Physical Presence Test
To meet this test, the individual taxpayer must be physically present in a foreign country for at least 330 full days during 12 consecutive months. It can begin with any day of the month. A full day is a period of 24 consecutive hours, beginning at midnight. Additionally, an individual's physical presence in a foreign country may be for any reason such as for business purposes or vacation time, or any combination of purposes.
Certain days are excluded and do not count as days spent in a foreign country if they are:
spent on traveling to and from the United States over international waters (in transit),
to recover from an illness,
war or civil unrest, or
under orders from superiors.
Waiver of Time Requirement
There are sometimes adverse conditions and emergencies that may require an individual to leave a country. Without the time requirement, the FEIE may not be met. Therefore, the IRS may waive the time requirements under certain circumstances.
Both the bona fide residence test and the physical presence test contain minimum time requirements. The minimum time requirements can be waived, however, if you must leave a
foreign country because of war, civil unrest, or similar adverse conditions in that country. You
must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. To qualify for the waiver, you must actually have
your tax home in the foreign country and be a bona fide resident of, or be physically present
in, the foreign country on or before the beginning date of the waiver. The Internal Revenue Service generally publish in the Internal Revenue Bulletin a list of countries that qualify for the waiver and the effective date.
For example: You were on 2 years assignment in the Democratic Republic of Congo starting June 1, 2018, and you repatriated to the US on December 30, 2018. Assuming you or your employer didn't have any intention to end your contract, then you qualify for the FEIE based on the IRS Revenue Procedure 2019-15. However, the exclusion of foreign income applies to the time you were actually working in the DRC.
Either you are new in expat life or you have been living in foreign countries as an expat for years, you should be aware of the qualification rules for the foreign earned income exclusion and also how to stay qualified for the FEIE if you must travel back to the U.S. and outside of a foreign country we defined above.
How can Whin Global help?
Because the foreign earned income exclusion and the housing exclusion or deduction is calculated on a daily basis, maximizing the number of days in a foreign country within the 12-month period and within the tax year increases your tax benefits.
Please call our office or contact us here to discuss your situation and to review your eligibility to qualify to take the foreign earned income exclusion (FEIE) and the housing exclusion or deduction, and to plan for the maximum tax benefit. We are here to assist you. there are alternative to FEIE if you do not qualify to take the FEIE.
Whin Global provides U.S. international tax compliance and consulting services to American expats, resident aliens, and nonresident individuals with US tax and/or foreign financial reporting needs. Get in touch for a tax consultation.