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If you’re a US citizen living abroad, you may qualify for a significant tax break: the Foreign Earned Income Exclusion (FEIE). This provision allows you to exclude a substantial portion of your foreign-earned income from US taxation—up to $126,500 in 2024. However, qualifying for this exclusion involves meeting specific requirements, such as passing the Bona Fide Residence Test.
In this guide, we’ll walk you through what it means to be a bona fide resident of a foreign country, how you can qualify, and how the Bona Fide Residence Test compares to the Physical Presence Test (PPT). We’ll also explore the advantages of each approach, so you can make an informed decision for your tax filing.
What Does “Bona Fide Resident” Mean?
To take advantage of the Foreign Earned Income Exclusion (FEIE), you must meet one of two key tests established by the IRS: the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test is more subjective, requiring you to prove you are truly established in a foreign country with the intent to stay.
How to Qualify for the Foreign Earned Income Exclusion
To qualify for the FEIE, you must pass either the Bona Fide Residence Test or the Physical Presence Test. In this article, we will focus on how to meet the Bona Fide Residence Test.
How to Pass the Bona Fide Residence Test
The IRS doesn’t provide a straightforward definition of “Bona Fide Residency,” making this test more subjective. Unlike the Physical Presence Test, which is primarily focused on the number of days you spend abroad, the Bona Fide Residence Test looks at a combination of factors.
To pass the Bona Fide Residence Test, you must meet all the following criteria:
- Establish Your Home Overseas: You must have your tax home and permanent residence outside the US.
- Live Abroad for a Full Calendar Year: You need to be a resident of your foreign country for a full calendar year (January 1st to December 31st).
- No Immediate Intention to Return to the US: You must show you have no immediate plans to return to the US permanently.
Let’s break down each point and what it means for qualifying under the Bona Fide Residence Test.
How to Establish Your Home Overseas
One of the most critical components of qualifying as a bona fide resident is proving that your tax home has shifted to your resident country. It’s not just about living in the country; you must show that you intend to stay long-term.
You can demonstrate this by providing supporting documentation, such as:
- A long-term visa or residence permit
- Local tax filings
- Health insurance from your host country
- A long-term lease or owned property
- Utility bills in your name
- Memberships in local organizations or gyms
- A local bank account or ID card
- Spouse or family ties within the country
These are just a few examples of the documents that could help prove your bona fide residency. While the IRS does not provide a specific list of documents, you’ll want to show strong ties to your host country to avoid complications.
Living Abroad for One Full Calendar Year
To qualify under the Bona Fide Residence Test, you must be a resident of your chosen foreign country for a full calendar year. This means staying in your country of residence from January 1st to December 31st.
You may take brief vacations or business trips, including to the US, but you must demonstrate your clear intention to return to your country of residence and continue living there without unreasonable delay.
Once you complete a full year abroad, you can start claiming your bona fide resident status. This also means you may qualify for part of a year in the next tax year, provided you fulfill the requirements for residency.
No Immediate Intention to Return to the US
A key aspect of the Bona Fide Residence Test is proving you don’t plan to return to the US immediately. For example, if you are on a long-term assignment or contract and have no intention of returning to the US soon, you might qualify. However, if you are on a short-term contract with a definite return date, you may not qualify under this test.
Documenting your intent to remain in your foreign country is crucial for proving your bona fide residency, especially if the IRS questions your status. For example, showing strong ties to your resident country—such as owning property or being employed locally—can help demonstrate your intent to stay abroad.
Bona Fide Residence Test vs. Physical Presence Test: Which Is Better?
Both tests—the Bona Fide Residence Test and the Physical Presence Test (PPT)—allow you to claim the Foreign Earned Income Exclusion (FEIE), but they come with different criteria and advantages.
Bona Fide Residence Test (BFR)
The Bona Fide Residence Test is more qualitative and focuses on whether you have truly established a life in your host country. It gives you more flexibility because you can leave for brief visits to the US without worrying about counting days. However, it can be more challenging to prove, and the IRS does not provide strict rules.
Physical Presence Test (PPT)
The Physical Presence Test, on the other hand, is quantitative. It requires you to be physically present in a foreign country for at least 330 full days during a 12-month period. The days do not have to be consecutive, but you must adhere to specific rules, such as what constitutes a “full day.”
While the PPT is easier to meet in certain situations, it limits your flexibility. You must strictly count days spent outside the US, and any time spent in the US counts against you.
Advantages of the Bona Fide Residence Test
The Bona Fide Residence Test offers more flexibility than the Physical Presence Test, especially if you plan to visit the US during the year. As long as you do not stay for more than a few months in the US, the BFR will not require you to count days abroad.
However, it’s important to note that any work performed in the US is taxable in the US. The FEIE only applies to income earned while you are living abroad.
How to Claim the Foreign Earned Income Exclusion
To claim the Foreign Earned Income Exclusion, you must file IRS Form 2555 along with your tax return. This applies whether you qualify through the Bona Fide Residence Test or the Physical Presence Test.
Conclusion: Maximizing Your Tax Savings Abroad
For US expats, understanding the Bona Fide Residence Test and how it qualifies you for the Foreign Earned Income Exclusion is key to reducing your tax burden. If you meet the criteria, this tax benefit can exclude up to $126,500 of income from US taxes in 2024. Whether you choose the Bona Fide Residence Test or the Physical Presence Test, knowing the requirements and documentation needed will help you maximize your savings.
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