How Do I Qualify For Expatriate Tax Deductions & Exclusions?


As an American living abroad, you have the burden of filing taxes in both your home and host country. Thankfully there are deductions and exclusions available to help you offset your expatriate tax liability. David McKeegan, co-founder of Greenback Expat Tax Services explains how you qualify as a US expat in order to maximize your expat tax deductions.

What is the definition of an expat for tax purposes?

Americans abroad often ask about the true definition of an expat because they want to know how to qualify for expatriate tax deductions like the Foreign Earned Income Exclusion and the Foreign Tax Credit. To be considered an expat, in the eyes of the IRS, your tax home has to be in a foreign country. Meaning, your regular place of business, where you work, the main place you live, needs to be in a foreign country. You also should have foreign earned income if you want this earned income to be excluded under the Foreign Earned Income Exclusion, or you need to be paying foreign tax if you want it to be excluded under the Foreign Tax Credit.

How to qualify for the expat tax credits and exclusions

To qualify for the Foreign Earned Income Exclusion  or the Foreign Tax Credit, you need to meet one of two tests:

The Bona Fide Resident Test

The Bona Fide Resident test says that you must live in a foreign country for at least one full calendar year, that’s January to December. You must have established residency in that country, and you must intend to stay in that country indefinitely. If you’re on a contract assignment somewhere for two years, something like that, you’re not going to qualify as a bona fide resident. Even if you plan on extending your contract, you probably still won’t qualify because the IRS will say that when the contracts up you should be coming back to the U.S. or they would expect somebody to come back to the U.S. in that case.

The Physical Presence Test

The other way you can qualify is known as the Physical Presence test, and this is much looser. To meet the rules of the Physical Presence test, you just have to be physically present inside a foreign country for 330 days in a 365 day period. This doesn’t have to be in a calender year, January to December, it can be May to May or September to September. This is much more flexible and first year expats will always qualify under the  Physical Presence test, even if you are moving someplace permanently because the rules of the Bona Fide Resident test say that you have to be abroad for one full year before you can even be considered for the Bona Fide Resident test. That’s all for today, please keep the questions coming we like getting them and we like answering them for you. Thank you very much.

Need More Information About Qualifying for Expat Tax Deductions?

Our blog is chock full of information on the Bona Fide Resident test and the Physical Presence test. If you would like us to prepare your expat taxes, simply click here to get started!

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