Saving money on expat taxes is a goal of all Americans living abroad – and fortunately, there are some great ways to help you achieve this goal. One such method, the Foreign Earned Income Exclusion, is a popular tool for excluding income earned abroad from your US Tax Return. There are two ways to qualify, depending on the length of time you’ve been (and plan to be) abroad. Here, we’ll break down what it means to be a bona fide resident and how it can help you save big on your expat tax return.
What is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion (FEIE) is a great tool for saving money on expat taxes, and many Americans working overseas choose to take advantage of the FEIE. This exclusion allows those who qualify the ability to exclude the first $105,900 of foreign earned income from 2019 expat taxes (and $107,600 from 2020 taxes). In order to use the FEIE, though, expats must qualify using one of two tests. Learn more about the FEIE in this article.
What is the Bona Fide Residence Test?
The Bona Fide Residence Test (BFR) is one of the tests that allow you to qualify for and use the FEIE to save on your US tax abroad. The BFR is a test that makes the most sense for expats who have lived abroad for over a year with no immediate intention of returning to the US permanently. In other words, your life now and in the foreseeable future will be lived overseas.
Who is a Bona Fide Resident?
The rules of the BFR Test seem fairly clear cut; however, the IRS’ definition of a bona fide resident isn’t quite as clear. There are several factors they look at to determine if you qualify as a bona fide resident for US expatriate tax purposes:
- Domicile: Not the same as your residence; it refers to the place you’ve established your life. This can be represented by opening certain foreign accounts, renting or owning a home, or integrating within the culture (joining a church or other activities).
- Intentions: A big factor of the BFR is proving your intentions. In most cases, if you have plans to remain abroad for an unspecified amount of time, there will be evidence of things you’ve done to establish domicile. On a contract with a US employer or chose to maintain a permanent residence in the US? It will be a challenge to prove that you qualify for the BFR, since it isn’t imminently clear that you are establishing a permanent foreign residence.
Also, if you claim non-resident status in your host country to take advantage of certain tax breaks, you probably won’t be able to qualify using the BFR, since declaring you aren’t a permanent resident of a foreign country is essentially claiming you are still a US resident in the eyes of the IRS. Learn more about the specifics of becoming a bona fide resident on the IRS website.
What If I Work Part-Time in the US?
Like most sticky situations – it’s ‘complicated.’ Generally speaking, though, if you work half the time in the US and half the time abroad, it would be hard to qualify as a bona fide resident of another country. On the other hand, say you have a short stint in the US (for example, a 90-day assignment) and your family and your domicile remains abroad – you’ll likely still qualify as a bona fide resident.
What Happens If I Move?
Maintaining your bona fide residency is possible, even if you move while overseas – so long as you don’t return to the US. In the eyes of the IRS, as long as your residency remains abroad, you can move from one country to another and still use the BFR to qualify for the FEIE.
The important thing to note is that you must have an abode in a location abroad, so if you’re living in the UK but will be moving to France for a period of time, you’ll want to maintain your abode in the UK or establish a new abode in France.
In any event, you must have a clear intention of returning to your primary abode in order to take advantage of the BFR. Otherwise, you may need to look into using the Physical Presence Test in order to qualify for the FEIE. You can read more about this test here.
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