An updated version of this article (2015) can be found right here!
The Bona Fide Residence test is mainly geared towards American expats who plan to reside overseas for good. The Physical Presence test is designed to give a tax break for those who are only away from home for eleven months or more. Qualifying for the exclusions can reduce or eliminate any US expat taxes that you might owe. However, it is not all cut and dry. Please review the information below and speak to a professional if you have any questions.
Qualifications on US Expat Taxes
In order to meet the requirements for the Physical Presence Test on your US expat taxes, your must:
- Be a US citizen or resident alien
- Be outside of the United States for 330 of any 365 consecutive days
- Be inside a foreign country legally (can not claim status from Cuba, North Korea, etc.)
- Each day on US soil (including inside US territories) is deducted from the total
- Each day spent traveling to or from the United States is also deducted
There are many deductions and exclusions the test will qualify you for. These include the Foreign Earned Income Exclusion, Foreign Tax Credit and the Foreign Housing Deduction. The key is to remain inside a foreign country for at least 330 days in a 365 day period. This time period is not based on the calendar year, instead it is calculated on a rolling twelve month basis. It is important to note that anytime that a US expat enters US soil, a full day is deducted from their time overseas.
- An American expat opens a new business in Paris, France, on October 1st, 2012 . He stays in France until September 17th, 2013. He would be eligible to claim the Foreign Earned Income Exclusion on his US expat taxes. He successfully passed the Physical Presence Test by residing inside a foreign country for 352 consecutive days.
- The same US expat in the above example traveled extensively to Europe and Asia during the same period. He would still meet the eligibility requirements because he remained outside of the United States for over 330 days. As such, he would be eligible for all of the expat deductions on his US expat taxes.
- The same US expat in example #1 came back to the United States during the entire month of March 2010 for business reasons. His total for the past 12 months would drop below the 330 day threshold. He could not claim the expat tax credits and exclusion on his US taxes.
- The Physical Presence Test can be applied to any consecutive 365-day period. It can start on any day of the month. For example, your first full day overseas was March 12th, 2013. The 365-day cycle can be calculated up until March 11th, 2014. You would be able to apply this to your US expat taxes at that time.
- There are no exceptions that apply to the Physical Presence Test. Any stay on US soil for any reason is counted against the US expat. This includes work, illness or vacation.
- International travel that brings an expat onto US soil counts as a day against the total. This is because that person is no longer within a foreign country.
- It is possible to meet the Physical Presence Test requirements and still have a tax liability. For example, you work in the UK under a flexible arrangement and you go to the US for three weeks. You work for 10 days in the US. You will owe US taxes on the money you earned during those 10 days. If you are in a situation similar to this we recommend contacting an expert on US expat taxes.
More About US Expat Taxes
For more in our series US Expat Taxes Explained, have a look at our post on the Foreign Tax Credit (Form 1116). If you have further questions about US expat taxes or would like to learn more about our expat tax services, please contact us.