Five Common Mistakes Expats Make With the Bona Fide Residence Test

Bona Fide Residence Test Errors

The Foreign Earned Income Exclusion (FEIE) is a money-saving deduction that many expats can qualify for. In order to do so, you have to use either the bona fide residence test or the physical presence test. The bona fide residence test usually seems straightforward at first glance. Unfortunately, like so many expat tax-related issues, it’s a little more complicated than it appears on the surface. Read our guide below to make sure you don’t make these five errors when filing your annual tax return if you plan to use the bona fide residence test. Your FEIE (and resulting tax liability) depends on it.


Error #1 – Believing The Only Criterion to Qualify With the Bona Fide Residence Test Is to Be Present for a Tax Year

While the bona fide residence test seems straightforward, it is much more subjective than the physical presence test. The bona fide residence test takes into account more than just your duration in your new residence – it also considers your intent and the nature of your job. For instance, if you are working in another country on a yearlong (or even longer) contract, the end date of your occupation can mean you don’t qualify using the bona fide residence test. But again, since this test is subjective and considers a number of factors, you may. If you’re working abroad as an employee of the US government, you won’t be eligible and should not complete Form 2555, the form that you use to qualify for the Foreign Earned Income Exclusion.

Error #2 – Thinking That Your Bona Fide Residence Is the Same as Your Domicile

Your residence may be your domicile – but it may not be, too. Your permanent home is your domicile; think of it as the place to which you always intend to return. Essentially, the bona fide residence test is based on the intention or purpose of your trip, and the nature and length of your stay outside the US. For instance, if you keep a home in the US, this does not altogether prohibit you from qualifying with the bona fide residence test, but it would be taken into account.

Error #3 – Trying to Use Both Tests

Don’t try to use both the bona fide residence and physical presence tests! You’ll want to do the travel math and make the decision to use the test that will be easiest for you to qualify for. If you try to use both, this could be cause for the rejection of your test. So, while your tax return may still go through the IRS process just fine, it could be completed without the use of the FEIE. And though the IRS would likely correct this error, that can take months to rectify and is certainly a headache you’ll want to avoid.

Error #4 – Assuming You Automatically Qualify If You Live Overseas for an Uninterrupted Year

First of all, since other factors are considered and each expat using the bona fide resident test will be considered on a case-by-case basis, you won’t automatically qualify. But also, an expat can leave the country of residence for brief trips back to the US or elsewhere for vacation and still qualify using the bona fide residence test. However, you must have a clear intention of returning from such trips to your foreign residence.

Error #5 – Supposing That US Citizens Are the Only People Who Qualify Based on the Bona Fide Residence Test

In addition to US citizens, US resident aliens who are citizens or nationals of a country with which the US has an income tax treaty in effect can use the bona fide residence test.

Some Last Thoughts

On the bright side, the bona fide residence test can be used to qualify for the Foreign Housing Deduction as well, if you have qualified housing expenses. That means filling out Form 2555 can help you meet the requirements for two money-saving deductions at once; so, being careful to avoid the above myths can save you a lot of money and is well worth the time spent to ensure accuracy.

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