What Is the Physical Presence Test?
US expats can often exclude their foreign-earned income from US taxation using the Foreign Earned Income Exclusion. However, to be eligible for the FEIE, you must pass one of two tests: the bona fide residence test or the physical presence test. In this post, we’re going to look at the second option.
What is the physical presence test? Here’s 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 Foreign Earned Income Exclusion.
- 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.
What Is the Physical Presence Test?
The physical presence test is a qualification that can be used to determine whether US persons are eligible for the Foreign Earned Income Exclusion. To pass this test, all of the following qualifications must be true:
- 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 365-day period. (This 365-day period does not have to align with a calendar year, and the 330 days do not have to be consecutive.)
- You have foreign-earned 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 330-day total.
Unlike the bona fide residence test, the physical presence test does not require you to be a bona fide resident of a single foreign country. Even if you are never in a single foreign country long enough to qualify as a bona fide resident, you can still qualify under the physical presence test as long as you spend enough time overseas. This is especially important for digital nomads, who rarely qualify for bona fide residency.
Additionally, the physical presence test is not impacted by whether you intend to return to the US. Even if you have plans to move back to the US at some point in the future, you can still pass the test.
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.
A key difference between the bona fide residence test and the physical presence test is that you must be physically present in a foreign country for at least 330 days in a full tax year to qualify for the bona fide residence test. However, if you want to qualify for the physical presence test, you must be physically present in a foreign country for at least 183 days out of a 365-day period.
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 for purposes of determining tax residency status. The IRS provides detailed instructions on how to fill out and submit the form.
Physical Presence Test Examples
Example #1
In 2021, John accepted a three-year work contract from a company based in Germany. John moved to Germany on November 1, 2021. On July 1, 2022, he flew back to the US for several business meetings. He returned to Germany on August 1 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, 2021, to November 1, 2022, is 31 days (July 1 to August 1). This means that he spent 334 days outside of the US during that same period (365 – 31 = 334) and thus meets the 330-day qualification for the physical presence test.
Example #2
Josephine moved to Japan for a job on October 30, 2021. On May 1, 2022, she resigned from her position and returned to the US for the remainder of the year. In total, she spent 183 days outside of the US in the 365-day period from October 30, 2021, to October 30, 2022. 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, 2022, 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. If Patrick remains outside of the US for the entire 365-day period from February 10, 2022, until February 10, 2023, he will pass the test.
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 physical presence test.
Minimum Time Requirement Waiver & the Physical Presence Test
The Minimum Time Requirement Waiver is an exception to the Physical Presence Test. If an expat cannot meet the Physical Presence Test requirements due to extenuating circumstances, such as war, civil unrest, or medical conditions, then 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 of the Physical Presence Test. Additionally, the waiver only applies to the Foreign Earned Income Exclusion 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, Physical Presence Test, and how it relates to the Foreign Earned Income Exclusion and whether you meet the eligibility criteria for this exclusion. Being aware of your eligibility status can have a significant impact on your US tax bill.
Contact us, and one of our customer champions will gladly 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.
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