Anyone planning on being their own expatriate tax preparer needs to know about the bona fide residence test. The bona fide residence test is used to determine whether you meet the eligibility requirements for certain tax deductions. The most significant deduction it will qualify you for is the Foreign Earned Income Exclusion. The bona fide residence test has simple criteria to meet the requirements. You or your US expatriate tax preparer can determine if you qualify by looking at your residency. As with nearly everything that the IRS is involved in, there are exceptions, so don’t assume you’ll automatically qualify. Additionally, you may want some assistance completing the Form 2555 from an expatriate tax preparer, as it can be tricky.
Qualifications for US Expat Taxes
To be considered a bona fide resident on your US expat taxes, you must meet all four of the following criteria:
- Be a US citizen (or a US resident alien of countries that have 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 intention of returning to the US permanently. The second part of this test can raise some tax issues for expats or the expatriate tax preparer.
Do you qualify as a bona fide resident? Get started on your US expat taxes with the expatriate tax preparers at Greenback. Click here to get matched with an accountant to review your individual situation today and confirm what you need to file.
Examples to Consider for Those Who Want to be a DIY Expatriate Tax Preparer
- A US expat moves to Germany for a two-year assignment with his business. He does not return home to the US 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 US.
- 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 the case if he has no immediate plans to move back to the US. 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, 2018, 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 2018 for additional training. During this time, his family remains in London. As of January 1st, 2019, 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 for many 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 significant impact on your US expat taxes and how you may want to approach the role of an expatriate tax preparer. This exclusion can save you thousands of dollars each year. Remember: 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 may not know when they will be able to return to the US. These types of situations could be difficult to understand for you and the IRS. Either way, qualifying via the bona fide residence test can save money when you file your taxes, so it is often best to speak with a professional expatriate tax preparer before assuming you qualify.
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Editor’s Note: This was originally published in 2011, and was updated on December 19th, 2019.