US people who live and work outside the United States may be able to exclude all or part of their foreign-source wages and self-employment income from the federal income tax through a provision called the Foreign Earned Income Exclusion (FEIE). However, to qualify for the FEIE, a person needs to either work or reside outside the United States, and meet either the bona fide resident or physical presence tests.
The Difference Between Bona Fide Residence And Physical Presence Test
Bona Fide Residence Test
You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the FEIE and foreign housing deductions only if you are a US citizen or a US resident alien.
To find out if you qualify for bona fide residence, you must first find out if you have established a residence in a foreign country. Your residence sometimes might not be the same as your domicile. Your domicile is your permanent home – a place to which you always return or intend to return. You can look at a bona fide residence test as being based on the intention or purpose of your trip, and the nature and length of your stay outside the United States.
Under the bona fide residence test, a taxpayer can leave the country for brief trips back to the US or elsewhere for vacation. However, you must have a clear intention of returning from such trips to your foreign residence.
Physical Presence Test
If you are physically present in a foreign country or countries 330 full days (a full day is 24 consecutive hours) during 12 consecutive months, you would then meet the physical presence test. The 330 days do not have to be consecutive, and this also applies to US citizens and US permanent residents.
One of the differences between this test and the bona fide residence test is that the physical presence test is based on how long a person stays in a foreign country, and is not dependent on the kind of residence established, the intentions of returning to the U.S, or the nature of the stay abroad.
Additionally, the 330 days for the physical presence test are counted for any reason staying abroad, not necessarily if it is for employment reason. You can even be on vacation. However, you do not meet the test if illness, family problems, a vacation, or your employer’s orders cause you to be present for less than the required amount of time.
Exceptions to Both Tests
Both tests have a time requirement for you to qualify. However, the minimum requirement can be waived if you must leave a foreign country because of war, civil unrest, or adverse conditions, as long as you can show that you are not meeting the test due to those conditions. You must have your tax home in the foreign country and be a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
Additionally, if you are in a foreign country in violation of US law, you will not be treated as bona fide resident or as physically present in a foreign country while you are in violation of the law. Income in those countries would not qualify as foreign earned income, and your housing expenses abroad could not be included in your foreign housing amount.
Bona Fide Residence Versus Physical Presence Test: Do You Have Specific Questions About Which Test You Should Use?
Greenback accountants know the specifics and can help you choose the test that is right for your situation. Contact us today!