The Bona Fide Residence Test: What It’s for and How To Qualify
Whether you’re a long-term foreign resident or a new expat, the bona fide residence test determines your residency status and may affect your US tax obligations. It’s also a gateway for Americans living abroad to access certain benefits.
Understanding and qualifying for the bona fide residence test can be tricky, but that’s where Greenback Expat Tax Services shines. With clients in over 190+ countries and territories, Greenback has unparalleled experience in helping expats navigate the complexities of US tax laws.
In this guide, we’ll define bona fide residence, provide examples of what does and does not count as bona fide residence, and help you determine if you meet the IRS requirements to qualify as a bona fide resident abroad.
Key Takeaways
- To pass the bona fide residence test, you must be a US citizen or US resident who is also a citizen or national of another country with which the United States has a tax treaty and have resided in a foreign country for an uninterrupted period that includes an entire tax year.
- For purposes of the bona fide residence test, taxpayers filing their income tax returns on a calendar year basis must reside in the foreign country from January 1 through December 31 of a calendar year.
- You could waive the time requirements of the bona fide residence test if you had to leave a foreign country because of war, civil unrest, or similar adverse conditions there.
What Is the Bona Fide Residence Test?
The bona fide residence test is used to gauge whether an American or US taxpayer is indeed a resident of a foreign country. The test is determined by IRS tax rules, and bona fide residency status does not apply to nonresident aliens or US citizens living in the United States.
Bona fide residents can be eligible for certain expat tax benefits, such as the Foreign-Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion or deduction. When used correctly, the FEIE saves US expats thousands of dollars on their US taxes because it allows them to exclude a significant amount of their foreign-earned income (up to $126,500 for the 2024 tax year) from being taxed by the US government. Sometimes, you can exclude even more if you’ve incurred housing costs in the same tax year.
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How To Qualify as a Bona Fide Resident of a Foreign Country
Qualifying as a bona fide resident of a foreign country in order to claim certain US expat tax deductions and exclusions requires meeting all five of these eligibility requirements:
- You must be a US person (either a resident alien or a US citizen) living in a country that has a US income tax treaty.
- You must actively earn foreign income and be a resident of that country. Unearned income, such as dividends, interest, and pension payouts, do not qualify you.
- You must have a residence in a foreign country.
- You must live within that country for the uninterrupted period of an entire tax year – typically January 1 through December 31 of a single 12-month period (though brief trips or vacations to the US may be allowed, depending on the number of days).
- You must not plan to move back to the US in the foreseeable future or have an end date for your work in that foreign country. Expatriates with student visas or temporary work visas do not qualify as bona fide residents, but green card holders may qualify.
You could waive the time requirements of the bona fide residence test if you had to leave a foreign country because of war, civil unrest, or similar adverse conditions there.
Most of these are pretty straightforward and objective. Still, there’s room for confusion, and you want to be crystal clear when it comes to taxes and filling out IRS forms. To help make this all clearer, here are some examples of when some might or might not pass the bona fide residence test.
Bona Fide Residence Test Examples
Here are some examples of what does or does not pass the bona fide residence tests.
Example 1
Sarah is an American citizen who buys a home in Ireland. She spends six months in Ireland and six months in the US every year.
Sarah does not pass the bona fide residence test. To qualify, she must spend at least one complete tax year in a foreign country while earning foreign income. Since Sarah only spends half of the year in Ireland, she does not meet the requirements for bona fide residency.
Example 2
Miguel, an American citizen, sells his home in the US and travels the world, staying in hotels, inns, hostels, and with host families. However, he never resides in a single country for more than a few months before moving on.
Miguel also does not pass the bona fide residence test. Since he does not live in one country for a full tax year, he does not qualify as a bona fide resident.
Example 3
Chris, an American, moves to Turkey in 2023 for a three-year work assignment. He lives exclusively in Turkey during this time and does not return to the US. However, he knows his work assignment will end in 2026, after which he will return to the US.
Chris does not pass the bona fide residence test. Although he has lived in Turkey for a full tax year, his plans to return to the US after his assignment disqualify him from being considered a bona fide resident.
Example 4
Adriana relocated from the US to Germany in July 2024, intending to stay permanently. However, by July 2025, she changes her plans and moves back to the US.
Adriana does not pass the bona fide residence test. While she lived in Germany for 12 months, she was not there for a complete tax year (January 1 to December 31).
Example 5
Jack accepts a job in China, moving from the US to Beijing in November 2024. By December 2025, he is still living in China and has no plans to return to the US.
Jack passes the bona fide residence test. He has lived in China for at least a full tax year (January 1 through December 31), earns foreign income, and has no current plans to return to the US. He qualifies as a bona fide resident and can claim the FEIE.
Example 6
Abby moved to India with her immediate family on January 1, 2024. During the year, her aunt in the US falls ill, so she returns to the US for three weeks to care for her. Afterward, she goes back to India, finds a job, and remains there through 2025 with no plans to leave.
Abby passes the bona fide residence test. She maintains a residence in India, stays there for a full tax year, earns foreign income, and has no plans to move back to the US. Her brief return to the US does not disqualify her, so she can claim the FEIE.
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Other Ways To Qualify for US Expat Tax Exemptions
There are other ways for Americans living abroad to avoid paying taxes on their foreign-earned income besides becoming a bona fide resident.
For instance, you could use the 330-day rule and file Form 2555 with your 1040 tax return if you don’t qualify as a bona fide resident but still spent a significant amount of time abroad. This lets you claim the FEIE by proving you were physically present in a foreign country for at least 330 full days during a 12-month period, even if you don’t meet the stricter requirements of the bona fide residence test.
An alternative to claiming the FEIE is the foreign tax credit. Taxpayers who have paid or accrued foreign income taxes in their country of residence can claim the foreign tax credit to avoid double taxation on their income by the US and the foreign country they lived in.
Choosing between the foreign tax credit and FEIE requires careful consideration. If you switch from FEIE to the foreign tax credit, you cannot claim the FEIE again for five years. To make the best decision and avoid tax issues, you should work with a qualified expat tax advisor who can help you understand your options.
How To Prepare for the Bona Fide Residence Test
If your goal is to be considered a bona fide resident of a foreign country outside the US, here are some tips to follow:
- Understand the requirements of bona fide residence: Familiarize yourself with the specific requirements of the bona fide residence test as outlined by the IRS. This includes establishing that you have a tax home in a foreign country, passing the substantial presence test, and demonstrating your intention to reside in the foreign country for an uninterrupted period that includes an entire tax year.
- Maintain accurate and organized financial records: Keeping accurate and organized financial records, including income, expenses, and other relevant financial transactions, is crucial for preparing your US tax return and supporting your bona fide residence status. This can help you accurately calculate and report your foreign-earned income and provide evidence of your residency abroad.
- Gather documents before leaving the US: It’s advisable to start collecting documents that can substantiate your bona fide residence status even before you leave the US. These may include lease agreements, employment contracts, utility bills, or other relevant records that demonstrate your intent to establish a genuine residence in a foreign country.
- Keep detailed records of time spent abroad: Maintaining meticulous records of your time spent abroad is crucial. This includes tracking the dates of your arrivals and departures from the foreign country, as well as any trips you may take outside the foreign country during the tax year. These records can serve as evidence to support your claim of being a bona fide resident of the foreign country, which the IRS may require in case of an audit.
By proactively preparing for the bona fide residence test, US expats living abroad can optimize their chances of meeting the requirements for claiming the FEIE and minimizing their US tax liability.
Questions About the Bona Fide Residence Test? We Are Here To Help!
Knowing whether you qualify as a bona fide resident (or will in the future) can dramatically impact how you file your taxes. Contact us, and one of our customer champions will be happy to help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
