The Foreign Earned Income Exclusion and the Bona Fide Residence Test

There are several tax deductions, exclusions and credits that are unique to US expats, which is great news in order to avoid double taxation. However, there are certain eligibility requirements you must meet in order to take full advantage of these potentially big savings on your taxes, one of which is the Bona Fide Residence Test for the Foreign Earned Income Exclusion.

What is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to $101,300 of foreign earned income from your 2016 US tax return. As you may be aware, your worldwide income is taxed by the US, meaning you are subject to identical tax rates as someone who is working and living inside the US, even if you are living abroad. This exclusion is a way you can avoid all or at least a significant portion of your income from being taxed by the US in addition to taxes in your host country. 

How Do I Qualify for the Foreign Earned Income Exclusion?

The FEIE is a great tool for saving on your expat taxes, but there are certain requirements you must meet in order to utilize it. These include:

  1. You must have foreign earned income
  2. Your tax home must be in a foreign country
  3. You must have passed one of the following:
  • The Bona Fide Residence Test: Must be a US citizen who is a ‘bona fide’ resident of a foreign country (or countries) for an uninterrupted period of time that includes an entire tax year, with no intention of leaving that foreign country in the near future
  • The Physical Presence Test: Must be a US citizen or US resident alien who is physically present in a foreign country (or countries) for at least 330 days during any period of 12 consecutive months

If you intend to live abroad indefinitely with no plans to return back to the US to live, the Bona Fide Residence Test is probably your best bet. Also, if you have family back in the States and you plan to visit them, you don’t have to worry as much about limiting your time and counting your days traveling/visiting as you would with the Physical Presence Test.

Physical Presence Test vs. Bona Fide Residence Test Examples

  1. An expat moves to Switzerland for a two-year assignment with her business. She doesn’t return home at all during those 24 months abroad. She establishes a foreign residence and remains there for an entire calendar year. Unfortunately, she won’t be eligible for the Bona Fide Residence Test because she intends to return to the US following her two-year assignment.
  2. An expat takes a job in the UK for a period of time. After living there for an entire calendar year, he would be considered to have met the requirements of the Bona Fide Residence Test IF he has no immediate plans to move back to the US.
  3. An expat purchases a home in France and spends six to nine months there each year. However, she doesn’t qualify as a bona fide resident because she maintains a home in the US.

As you see, the small details of your situation can make a big impact on which test you can utilize to take advantage of the Foreign Earned Income Exclusion. In order to be able to use this exclusion, you must be able to pass one of the two tests, so be sure to consider which will be the best for you in the long run. It’s always a good idea to discuss this with an expat tax professional, as he or she can offer advice and guide you in the right direction in order to save the most money on your US taxes abroad. Be sure to download a US expat tax guide for your particular tax situation for more details about credits, deductions and exclusions available to expats.

Need Help Understanding the Foreign Earned Income Exclusion?

Our team of expat-expert CPAs and IRS Enrolled Agents can help you find the information and resources you need to make filing your expat taxes a more hassle-free process. Contact us today!

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