This article was first published on November 29, 2011. It was updated on June 14, 2014, with information relevant to the 2013 and 2014 tax years.
You can save big on your US expat taxes if you qualify for the big deductions, credits and exclusions that exist to minimize dual taxation. One option in qualifying for expat status includes qualifying as a bona fide resident of a foreign country. This video details everything you need to know about qualifying through the Bona Fide Resident Test.
Hi, my name is David McKeegan and I’m the President of Greenback Expat Tax Services and I wanted to tell you a little bit today about the Bona Fide Residence Test. As you may know this is one of the two tests that you need to pass in order to be considered an expat for your tax purposes.
So what does this really mean? You want to qualify as an expat so that you can receive the foreign earned income exclusion (which is $97,600 for the 2013 tax year and $99,200 for the 2014 tax year, the foreign housing allowances and the deductions you can get there (which can also be quite significant), as well as the Foreign Tax Credit, which allows you to offset some of the money you would owe on your US taxes because you’ve paid to taxes in a foreign country already, and that’s a dollar for dollar offset so that’s a very good one to have as well.
So, what do you need in order to qualify has a bona fide resident? Well, the first thing is you have to be either a US citizen or a US resident alien and you have to be living in a foreign country.
Now, the second part is that you have to be a resident in a foreign country. So how do you know if you are a resident in a foreign country? Well, the first part would be do you have a resident card in that country. The second question you could ask yourself is “Am I paying taxes in this country and can I show that to the IRS if I need to, to show that I am actually living and working and residing full-time in this foreign country?”.
The third part to this test is whether you’re residing full-time in the foreign country. So, in order to qualify for the bona fide resident, you have to be living there for a least one year to begin with and you have to have no intentions of going back to the United States.
Now, this can be very difficult to gauge or to judge. Now, how can you say that I have no intention of ever going back to the US? Well, it’s not never, it’s just no immediate plans to go back and this is something you can speak to your accountant about to make sure that you do qualify if you already know that you’re not going to qualify for the physical presence or if you’re worried/ you prefer to go down the route of the bona fide resident test because you do want to spend a little bit more time either in the US or outside the US in other countries.
So, let’s just talk for a moment about a couple of examples, the first example would be somebody that gets transferred to, let’s say, Germany by a US company for a two year contract. Now, because the length of time that you’re in this foreign country (in Germany) is a two year contract, you wouldn’t be able to qualify for the bona fide present test because you already know that you’re there for a finite amount of time.
Another example, let’s say you like to summer in Costa Rica or winter to Costa Rica and spend the rest of the time in the United States. So, let’s say you’re down in Costa Rica for nine months a year and in the United States for three months of the year. Again, you wouldn’t qualify under this example because you’re not living there full-time you’re actually splitting time between the United States and Costa Rica.
Another example would be if you move over to the UK, you get a job in the UK and you’re just living there, you’re working there, maybe you get married to somebody in the UK or something like that. Now, you would qualify because now you’re actually living in the UK, you have no immediate plans of moving back to the United States. So, this is an example of somebody that would qualify.
Again, this one can be quite confusing and as always, I would recommend speaking to a qualified accountant before making any mistakes or making any decisions that could lead to a mistake and cause you a big tax burden.
Any of our accountants at Greenback Expat Tax Services will be more than happy to speak to you and talk through whether or not you qualify as a bona fide resident, or whether you would qualify for the physical presence test. Thank you.
More Questions About Qualifying as a Bona Fide Resident?
Have a look at this blog post “US Expat Taxes Explained: The Bona Fide Residence Test” for more details. If you have other questions about residence issues or would like to know more about our expat tax services, please contact us.
Copyright Greenback Expat Tax Services November 29, 2011, Updated June 14, 2014