What Is the Physical Presence Test?

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. 

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 test that the IRS uses to determine whether US persons are eligible to claim 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 physical presence test. 

Important

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.

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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 physical presence 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. 

Still Have Questions About the Physical Presence Test? We Are Here to Help!

What is the physical presence test? Knowing whether you pass this test can significantly impact your US tax bill. Hopefully, after reading this post, you better understand the physical presence test and whether you are eligible for the Foreign Earned Income Exclusion. Contact us, and we’d be happy to help you.

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