As a US expat, chances are, you are on the lookout for ways to save on your expatriate taxes. Fortunately, there are some great credits, exclusions and deductions available to Americans living abroad that can be taken advantage of – if you qualify. That’s right – these generally aren’t automatically applied because you live overseas. Instead, you must meet certain criteria laid out by the IRS in order to utilize most of these savings opportunities. If you consider yourself a long-term expat, you may want to focus on the Bona Fide Residence Test (BFR) in order to save big. Here’s what you should know about the BFR.
Breaking Down the BFR
Essentially, the BFR has two parts that must be satisfied in order use it to save on your expatriate taxes. One, you must live overseas for more than one calendar year and two, you have no immediate intentions of returning to the US permanently. That doesn’t mean you can’t visit the US or your intentions can’t change in the future – instead, it means your life now and for the foreseeable future is outside of the US.
So, what makes you a bona fide resident? Well, it’s not as straightforward as you’d hope! The IRS will look at a number of factors to determine if you qualify, including:
- Domicile: This is not the same as your residence. Instead, it refers to the place you’ve established your life, in terms of opening foreign accounts, renting or owning a home, and immersing yourself in the local culture by joining organizations, a church, etc.
- Intentions: You must prove your intentions to the IRS, which can be done by showing things you’ve done to establish your domicile. If you happen to be an expat on a contract with a US employer, the BFR may prove to be tricky for you. For example, if you maintain a permanent residence in the US, leave your family back in the US or don’t establish a true foreign residence, the IRS may not view you as a foreign resident. This is often the case for military and others on short-term contracts overseas, since they move from country to country without establishing a true ‘home’, leaving their families back at their home base in the US.
Additionally, it can be very difficult or even impossible to qualify for the BFR on your expatriate taxes if you claim non-resident status in your foreign country. Some countries do offer tax breaks to non-residents, but you have to claim your status in order to take advantage of them. Thus, if you declare you aren’t a resident of a foreign country, you’re basically admitting your still a US resident. Knowing this, it’s important for Americans working overseas to do their research in order to determine the best course of action.
Working Part-Time in the US
This can be a sticky situation, but essentially, if you work 50% of the time in the US and 50% of time abroad, you will probably not qualify as a bona fide resident of a foreign country. On the other hand, if you work for a short number of days in the US on a specific assignment and your family remains abroad (and your domicile), then you should still be able to qualify as a bona fide resident. At the end of the day, it’s all up to the discretion of the IRS when evaluating your US tax return.
Not Qualifying for the BFR
There are many US expats who don’t qualify for the BFR because of the strict qualifications, so fortunately there is another option: the Physical Presence Test (PPT). To qualify for this, you must be inside a foreign country for 330 out of any 365 day-period. If you’re overseas for a shorter period of time or you are aware your overseas contract will end at some point (which would mean a return to the US), the PPT would be the option for you when it comes to your expatriate taxes.
Example Using the BFR: Carla Expat
Sometimes, the best way to understand a concept is with an example. With that in mind, please meet Carla Expat. Carla moved to Medellin, Colombia in 2014 with her young son to avoid the cold winters of Buffalo, New York. She received a job at large telecommunications company, and has been issued a TP-4 workers visa by Colombia. She has purchased a small house just outside the city.
Carla wants to claim the BFR status on her Form 2555 for 2016 to accompany her expatriate taxes. Since she moved in 2014, she has spent the entire calendar year of 2015 outside of the US, so she meets the first part of the test. Since she has purchased a house, has a visa in her new country, and has moved with her family, all indications are that she intends to remain in Colombia – thus, she will qualify.
Carla would fill in the top part of the Form 2555 just like someone qualifying under the Physical Presence Test would, by including her name and address, her employer’s name and address, and other information.
Carla then fills in part 2 of the form to qualify for the BFR status. Here, she indicates that she continues to live in Colombia, has purchased a home, lives with her family, and pays taxes to the Colombian government. You don’t need to have all of these elements to qualify for the BFR status, but the more proof you have that you are setting up your life in a new country, the better.
Not Sure If You Qualify for the Bona Fide Residence Test?
Our team of expat-expert CPAs and IRS Enrolled Agents can help ensure you take advantage of all of savings available to you on your US expatriate taxes while living abroad – get started with us today!