This article was first published on April 20, 2011. It was updated on June 16, 2014 with information relevant to the 2013 and 2014 tax years.
The Bona Fide Residence test is a test used on your US expat taxes. The test is used to determine whether you meet the eligibility requirements for certain tax deductions. The biggest deduction it will qualify you for is the Foreign Earned Income Exclusion. This test has some simple criteria to meet the requirements. You or your US expat tax preparer can determine if you qualify by looking at your residency. As with nearly everything that touches the IRS, there are exceptions. You should check before assuming you will meet the requirements. Additionally, you may want some additional assistance completing the Form 2555, as it can be tricky.
Qualifications for US Expat Taxes
In order to be considered a bona fide resident on your US expat taxes, your must meet all four of the following criteria:
- Be a US citizen (or a US resident alien of countries that share a US tax treaty)
- Have an established residence within a foreign country
- Reside inside that foreign residence for the entire calendar year
- Have intentions of staying inside that country indefinitely
To qualify under the Bona Fide Residence test, a person must first live within a foreign country for the entire year. The second part is having no immediate intentions of returning to the United States permanently. The second part of this test can raise some tax issues for US expats. We have included a few examples below.
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- A US expat moves to Germany for a two-year assignment with his business. He does not return home to the United States at all during those 24 months abroad. This person establishes a foreign residence and remains there for an entire calendar year. Unfortunately, he is not eligible for the Bona Fide Resident test. This is because he intends to return to the United States.
- A US expat purchases a home in the UK and spends six to nine months in the UK every year. He does not qualify as a bona fide resident because he still maintains a home in the US.
- A US expat accepts a position in China for a period of time. After remaining in China for an entire calendar year, this person would be considered to meet the needs of the Bona Fide Resident test. This is only if he has no immediate plans to move back to the United States. This last part is key: “if he has no immediate plans to move back to the US.”
- A US expat moves his entire family to London on January 1st, 2013, and purchases a home there since he plans to work there indefinitely. His company has him return to the US for three weeks during the summer of 2013 for additional training. During this time his family remains in London. As of January 1st, 2014, this person could claim to be a bona fide resident of London. This is because he was a resident there for the entire calendar year. This person would now be eligible a number of credits and exclusions on his US expat taxes. These include the Foreign Earned Income Exclusion, Foreign Tax Credit and the Foreign Housing Credit.
Your status as a bona fide resident can have a big impact on your US expat taxes and can save you thousands of dollars each year. A large part of the Bona Fide Resident test is based on future intent. The IRS handles each claim on a case-by-case basis.
For example, some Americans may be employed overseas. However, they truly may not know when they will be able to return to the US. These types of situations could be difficult to understand. Either way, it can save money when you file your US expat taxes. It is often best to speak with an expert with US expat taxes before assuming you qualify.
Need to Know More About US Expat Taxes?
If you don’t qualify as a bona fide resident, you may qualify for deductions through the Physical Presence test. If you need further information about US expat taxes or would like to learn about our expat tax services, please contact us.