What Is the Physical Presence Test?
US expats can often exclude their foreign-earned income from US taxation using the Foreign Earned Income Exclusion (FEIE). However, to be eligible for the FEIE, you must pass one of two tests: the bona fide residence test or the physical presence test (also known as the substantial presence test). In this post, we’re going to look at the second option.
What is the physical presence test? How does this test impact your income tax return? This tax guide will tell you what you need to know, along with some physical presence test examples.
Key Takeaways
- The physical presence test is one way of determining whether Americans living overseas are eligible for the FEIE.
- To pass the physical presence test, you must spend at least 330 full days outside of the US in any 365-day period.
- Americans who pass the physical presence can use the Foreign Earned Income Exclusion to reduce or erase their US tax bill.
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What Is the Physical Presence Test?
The physical presence test is a qualifying examination that can be used to determine whether US persons are eligible for the Foreign Earned Income Exclusion (the limit is set at $126,500 for the 2024 tax year).
To pass this test, all of the following qualifications must be true according to US law:
- You are a US citizen or resident alien (green card holder).
- You have a tax home in a foreign country.
- You are physically present in one or more foreign countries for at least 330 full days out of any 12-month period. (This 365-day rule does not have to align with a calendar year, and the 330 days do not have to be in consecutive months or days.)
- You have earned foreign income. (Foreign earned income includes a salary, wages, bonus, or self-employment income received from a non-US source. Unearned income such as interest, dividends, pension distributions, or capital gains are not eligible.)
Note that the 330-day requirement refers to full 24-hour days beginning and ending at midnight. If you are present inside the US for any part of a 24-hour day, it will not count toward the number of days needed to qualify.
Difference between Physical Presence Test and Bona Fide Residence Test
The physical presence test offers more flexibility than the bona fide residence test, as it does not require taxpayers to establish residency in a single foreign country. Instead, it focuses solely on the amount of time spent overseas. This makes it particularly advantageous for digital nomads or individuals who frequently move between countries and do not stay in one location long enough to establish bona fide residency.
Another important distinction is that the physical presence test is unaffected by your intention to return to the US. Even if you plan to move back, you can still qualify as long as you meet the time requirements.
Key Difference:
- To meet the physical presence test, you must be physically present in a foreign country for at least 330 full days within a consecutive 12-month period.
- The bona fide residence test, on the other hand, requires establishing residency in a foreign country for an entire tax year and proof of intent to make it your primary home.
The 330-day requirement of the physical presence test can be waived under a few rare circumstances. Specifically, if you are forced to return to the US because of war, civil unrest, or “similar adverse conditions,” this requirement may be waived.
Understanding these differences can help you determine which test best suits your circumstances and qualifies you for the Foreign Earned Income Exclusion (FEIE).
Form 8843: Who Needs To File it?
Form 8843 is a tax form that must be filed by certain nonresident aliens, including students, teachers, and professional athletes, who are temporarily present in the United States.
The form is used to claim a treaty exemption or explain the individual’s circumstances and days of presence in the US to determine tax residency status. The IRS provides detailed instructions on how to fill out and submit the form.
Physical Presence Test Examples
Understanding the physical presence test can be complex, so examining real-life scenarios can provide clarity. In this section, we will explore various examples that illustrate how the test is applied.
These examples demonstrate different situations, helping you understand the requirements and nuances of meeting the physical presence test for tax purposes. Whether you’re a frequent traveler, an expatriate, or someone with multiple residences, these scenarios shed light on how to navigate and satisfy the test’s conditions.
Example #1
In 2023, John accepted a three-year work contract from a company based in Germany. John moved to Germany on November 1, 2023. On July 1, 2024, he flew back to the US for several business meetings. He returned to Germany on August 1, 2024, and remained there for the rest of the year.
The total time John spent in the US during the 365-day period from November 1, 2023, to November 1, 2024, is 31 days (July 1 to August 1). This means he spent 334 days outside the US during the same period (365 – 31 = 334) and meets the 330-day qualification for the physical presence test.
Example #2
Josephine moved to Japan for a job on October 30, 2023. On May 1, 2024, she resigned from her position and returned to the US for the remainder of the year. In total, she spent 183 days outside the US in the 365-day period from October 30, 2023, to October 30, 2024. Because this is less than 330 days, Josephine does not pass the physical presence test and is not eligible to exclude her foreign-earned income from US taxation.
Example #3
Patrick moved to Portugal on February 10, 2024, to work as a digital nomad. Since then, he has traveled throughout Europe, staying in each country for an average of two months before moving on. He plans to continue this lifestyle indefinitely. Patrick will pass the test if he remains outside the US for the entire 365-day period from February 10, 2024, to February 10, 2025.
Example #4
Alicia lives in Minnesota but works for a Canadian company based in Ontario. Every workday, she crosses the border into Canada for her job. At the end of the day, she returns to her home in Minnesota. Throughout the week, she is never in Canada for a full 24 hours. Because Alicia’s partial days working in Canada do not count toward the 330-day minimum, she will not pass the test.
Minimum Time Requirement Waiver for the Physical Presence Test
The Minimum Time Requirement Waiver is an exception to the physical presence test. Suppose an expat cannot meet the physical presence test requirements due to extenuating circumstances, such as war, civil unrest, or medical conditions. In that case, they may qualify for the Minimum Time Requirement Waiver.
To be eligible for the waiver, an expat must be able to demonstrate that they would have met the 330-day requirement if not for the extenuating circumstances. The waiver can provide relief for expats who have to leave a foreign country early due to unforeseen events or those who cannot return to the foreign country due to travel restrictions or medical issues.
It’s important to note that even if an expat qualifies for the waiver, they still need to meet the other requirements. Additionally, the waiver only applies to the FEIE and does not affect the Foreign Tax Credit.
Still Have Questions About the Physical Presence Test? We Are Here To Help!
After reading this post, you should have a clearer understanding of the FEIE and physical presence test, how they relate, and whether you meet the eligibility criteria. Being aware of your eligibility status can significantly impact your US tax filing.
Contact us at Greenback Expat Tax Services, and one of our customer champions will gladly help. If you need advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
