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Expat Tax Essentials
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? Here are some key facts to know.
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 U.S. is not sufficient 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:
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.
The point of the test is for U.S. taxpayers to qualify for FEIE.
FEIE, when used properly, can save U.S. expats thousands of dollars on their U.S. 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 U.S. taxes on any foreign income you earn while working abroad. In this case, foreign earned income includes:
The FEIE isn’t automatic for U.S. expats. In order to qualify, you must pass the bona fide residence test.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
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:
Most of these are pretty straightforward and objective. Still, there’s room for confusion, and when it comes to taxes, you want to be crystal clear. To help make this all clearer, here are some examples of when some might–or might not–pass the bona fide residence test.
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. Every year, she spends six months in Ireland and six months in the U.S.
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 U.S. At the end of those three years, however, his work assignment will be over, and he will be transferred back to the U.S.
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 U.S. 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 U.S.
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 U.S., 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, 2030. While there, her aunt in the U.S. 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 2030, 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 U.S. briefly during the year, it wasn’t a long enough stay to disqualify her from being a bona fide resident of India.
Qualified expats can exclude up to $108,700 on their U.S. 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.
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 U.S. 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.
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.
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.
Knowing whether you qualify as a bona fide resident—or will in the future—can dramatically impact how you file your taxes. In many cases, it could save you thousands of dollars. If you’d like some help with your expat taxes, we’d love to lend a hand. Contact us, and we’d be happy to help you.