What to Know to Qualify Under the Bona Fide Residence Test
- What Is the Bona Fide Residence Test?
- What Is the Point of the Bona Fide Residence Test?
- What Is Foreign Earned Income Exclusion?
- What Are the Qualifications for Bona Fide Residence?
- What are the Benefits of the Bona Fide Residence Test?
- How Much Foreign Income Can You Exclude?
- Claiming Foreign Tax Credit
- Foreign Tax Credit vs. FEIE
- Can I Be a Bona Fide Resident for Only Part of a Year?
- How Can US Expats Living Abroad Prepare for the Bona Fide Residence Test?
- Questions About the Bona Fide Residence Test? We Are Here To Help!
If you’re an American expat living abroad or considering moving abroad, you’ve probably heard of the “bona fide residence test” before. But what is the bona fide residence test, and how does it work? Read on if you want to know if you qualify as a bona fide resident of a foreign country.
- To satisfy the bona fide residence test, you must (a) 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, (b) have residence in a foreign country, and (c) reside in the foreign country for an uninterrupted period that includes an entire tax year.
- For purposes of the bona fide residence test, for taxpayers filing their income tax returns on a calendar year basis, you must reside in the foreign country from January 1 through December 31 of a calendar year.
- The time requirements of the bona fide residence test can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in such foreign country.
What Is the Bona Fide Residence Test?
The bona fide residence test is used to gauge whether an American is indeed a resident of a foreign country. Simply moving out of the US is insufficient for the IRS to consider you an expat. You have to meet specific qualifications first.
Until you do, you may not be eligible for certain expat tax benefits, such as the following:
- Foreign Earned Income Exclusion (FEIE)
- Foreign Housing Exclusion
- Foreign Housing Deduction
Even if you’ve lived in another country for some time, it’s never wise to assume that you’re a bona fide resident in the eyes of the IRS. So how can you be sure?
That’s where the bona fide residence test comes in for form 2555 (FEIE).
What Is the Point of the Bona Fide Residence Test?
The Bona Fide Residence Test is used by US Taxpayers who are subject to income tax in the US and want to claim foreign-earned income exclusion.
To qualify for FEIE, a taxpayer must have been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The test is part of the Internal Revenue Code and does not apply to nonresident aliens or US citizens living in the United States.
What Is Foreign Earned Income Exclusion?
FEIE, when appropriately used, can save US expats thousands of dollars on their US taxes. However, this is not an umbrella foreign income exclusion. Instead, there are specific stipulations on what you can and cannot exclude.
The foreign-earned income exclusion can help reduce or completely eliminate US taxes on any foreign income you earn while working abroad. In this case, foreign earned income includes:
- Self-employment income
The FEIE isn’t automatic for US expats. In order to qualify, you must pass the bona fide residence test.
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What Are the Qualifications for Bona Fide Residence?
In order to qualify as a bona fide resident and claim certain tax deductions and exclusions available for expats, you must meet all five of these requirements:
- You must be a US person (either a resident alien or a US citizen) living in a country that has a tax treaty with the US
- You must actively earn foreign income in the country where you’ve taken residence — unearned income, such as dividends, interest, and pension payouts, do not qualify.
- You must have a residence in a foreign country.
- You must live within that country for an entire tax year – typically January 1 through December 31 of a single year (though brief trips or vacations to the US may be allowed)
- You must not have any plans of moving back to the US in the foreseeable future or have an end date for the work you are doing in the foreign country— student visas and temporary work visas do not qualify.
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. To help make this all clearer, here are some examples of when some might–or might not–pass the bona fide residence test.
Examples of Bona Fide Residence Tests
Here are some examples of what does or does not pass the bona fide residence tests.
Let’s say 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 become a bona fide resident, she must spend at least one full tax year in a foreign country while earning foreign income. Because she only stays in Ireland for six months, she does not meet the essential qualification for bona fide residency.
Another example is Miguel, an American citizen who sells his home in America and explores the world. He travels globally, lodging in hotels, inns, and hostels. Sometimes, he finds a host family to live with. Regardless, he never stays in one country for more than a few months before moving on.
Miguel also does not pass the bona fide resident test. Like Sarah, he does not stay in any single country for a full tax year and, as a result, does not qualify as a bona fide resident.
Chris is an American who moves to Turkey for a three-year work assignment. During those three years, Chris lives exclusively in Turkey and never once returns to the US. At the end of those three years, however, his work assignment will be over, and he will be transferred back to the US.
Chris does not pass the bona fide residence test. Even though he lives in Turkey for at least a complete tax year, he already has plans to return to the US. As a result, he is not a bona fide resident.
Adriana moves from America to Germany in July of 2022, expecting to remain permanently. However, a year later, in July of 2023, she changes her plans and returns to the US.
Adriana does not pass the bona fide residence test. While she is in Germany for 12 months – a full year – she is not there for a single complete tax year. That would require her to reside in Germany from January 1 until December 31 of the same year.
Jack accepts a job in China, where he may be employed indefinitely. He moves from America to a home in Beijing in November of 2024. In December 2025, he is still living in China without plans to leave.
Does Jack pass the bona fide residence test? Yes! Because Jack has lived in a foreign country for at least a full tax year, earns foreign income, and has no current plans to return to the US, he has established bona fide residence, meaning he can claim the Foreign Earned Income exclusion.
Abby moves to India with her immediate family on January 1, 2022. While there, her aunt in the US becomes sick, and she returns for three weeks to help care for her relative. Then, she returns to India, finds a job, and remains until the end of 2022, with no plans to leave.
Abby does pass the bona fide residence, meaning she can claim FEIE. She has a residence in India, stayed there for a complete tax year, earns foreign income, and has no plans to move again. Even though she was in the US briefly during the year, it wasn’t a long enough stay to disqualify her from being a bona fide resident of India.
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What are the Benefits of the Bona Fide Residence Test?
The primary benefit of this test is that it allows expats who live abroad to avoid paying US taxes on their worldwide income (with some exceptions).
By contrast, there are other ways for Americans living abroad to avoid paying taxes on their foreign-earned income–but those methods come with significant restrictions or limitations.
For example: If an American citizen lives abroad for less than 330 days during any given year, then they’ll need to file Form 2555EZ with their 1040 return in order not only to claim their exemption but also prove compliance with IRS rules regarding bona fide residence status during those periods when they were outside America’s borders.
How Much Foreign Income Can You Exclude?
Qualified expats can exclude up to $108,700 on their US taxes. Sometimes, you can exclude even more if you’ve incurred housing costs in the previous tax year.
If you are married, and your spouse passes the bona fide residence test, you can claim the FEIE.
Claiming Foreign Tax Credit
An alternative to claiming FEIE is claiming the Foreign Tax Credit. This is for taxpayers who have either paid or accrued foreign income taxes in the country in which they live. The Foreign Tax Credit is designed to protect taxpayers from paying double taxation when their income is subject to foreign and US taxes.
The Foreign Tax Credit works as a dollar-for-dollar credit equal to the amount of foreign income taxes you’ve paid.
This credit is subject to a variety of limitations. In January 2022, the IRS revised the definition of foreign income tax by stating that it is a foreign levy that qualifies as either foreign tax, net income tax, or an in-lieu-of-tax.
Foreign Tax Credit vs. FEIE
When claiming either the foreign tax credit or the FEIE, it’s important to choose wisely. If you claim the FEIE and then change the claim back to the Foreign Tax Credit, you are barred from claiming the exclusion again for five years.
So how do you decide which option is best for you? It’s important to choose carefully to stay in good standing with the IRS and not run into delinquent taxes. Working with a qualified expat tax advisor is the best way to understand your options and determine which is right for you.
Can I Be a Bona Fide Resident for Only Part of a Year?
In a sense, yes. You can only qualify as a bona fide resident as long as you spent an entire tax year in a foreign country. However, if you meet that qualification, you may also qualify for part of the previous or next year.
For example, let’s say you moved to Argentina in May 2019 and stayed there until February of 2021. In this case, because you spent the entire tax year of 2020 in Argentina, you count as a bona resident for the time you lived there in 2019 and 2021, even though those were not complete tax years.
How Can US Expats Living Abroad Prepare for the Bona Fide Residence Test?
Living abroad as a US expat can be an exciting adventure, but it also comes with tax responsibilities, including meeting the requirements of the Bona Fide Residence Test to claim the Foreign Earned Income Exclusion (FEIE). To prepare for the Bona Fide Residence Test, consider the following tips:
- 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 of 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.
- 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.
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.