Bona Fide Residence vs. Physical Presence Test
US citizens who live and work outside the United States may be able to exclude all or part of their foreign-earned wages and self-employment income from the federal income tax through a provision called the Foreign Earned Income Exclusion (FEIE).
However, to qualify for the FEIE, a person needs to either work or reside outside the United States and pass the Bona Fide Residence or Physical Presence Test to prove eligibility.
Key Takeaways
- The Bona Fide Residence Test can be used if you intend on living in a country indefinitely and you are there for at least one calendar year (a calendar year starts on January 1st and ends on December 31st.)
- To meet the requirements for the Physical Presence Test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. The days do not have to be consecutive.
Bona Fide Residence Test
The bona fide residence test can be used if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes a calendar year. Any foreign-earned income for the time before and after this calendar year can also be claimed under the foreign-earned income exclusion, but only after you have been living outside the US for a calendar year. The mechanics of claiming all your time overseas can be a little tricky but take note that all your time abroad counts after you meet the calendar year test. You can use the bona fide residence test to qualify for the FEIE and foreign housing deductions only if you are a US citizen or a US resident alien.
To qualify as a bona fide resident of a foreign country, you must have established a residence there. Your residence is not always the same as your domicile. Your domicile is your permanent home – a place you always return to or intend to return to.
You can look at a bona fide residence test based on the intention or purpose of your trip and the nature and length of your stay outside the United States.
Under the bona fide residence test, taxpayers can leave the country for brief trips back to the US or elsewhere for vacation. However, you must have a clear intention of returning from such trips to your foreign residence.
Physical Presence Test
If you are physically present in a foreign country or countries for 330 full days (a full day is 24 consecutive hours) during 12 consecutive months, you would then meet the physical presence test. What this full-day requirement means is that if you spend any time in the US, even just one second, then you have not spent a full day in a foreign country and therefore that day does not count towards the required 330 days. The 330 days do not have to be consecutive. The day count can start on any day – it does not need to start on January 1 as it can be any 12-month period. This also applies to US citizens and US permanent residents.
One of the differences between the physical presence test vs. the bona fide residence test is that the physical presence test is based on how long a person stays in a foreign country and is not dependent on the kind of residence established, the intentions of returning to the US, or the nature of the stay abroad.
Additionally, the 330 days for the physical presence test are counted for any reason for staying abroad, not necessarily if it is for employment reasons. You can even be on vacation. However, you do not meet the test if illness, family problems, a vacation, or your employer’s orders cause you to be present for less than the required amount of time.
Exceptions to Both Tests
Both tests have a time requirement for you to qualify, whether you’re looking at the bona fide resident or physical presence tests.
However, the minimum requirement can be waived if you must leave a foreign country because of war, civil unrest, or adverse conditions, as long as you can show that you are not meeting the test due to those conditions. You must have your tax home in the foreign country and be a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
There is also an exception to the 330-day physical presence test. If you are on a flight that transits through the US for less than 24 hours and you do not leave the airport, then that time does not count as time in the US – it counts as a full day outside the US.
Additionally, if you are in a foreign country in violation of US law, you will not be treated as a bona fide resident or as physically present in a foreign country while you are in violation of the law. Income in those countries would not qualify as foreign-earned income, and your housing expenses abroad could not be included in your foreign housing amount. These countries include sanctioned countries such as Iran and North Korea.
Do You Have Specific Questions About Which Test You Should Use?
Greenback accountants know the specifics and can help you choose the right test for your situation, including the bona fide residence vs. physical presence tests. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
