What is the Bona Fide Residence Test?
The Bona Fide Residence test is one of two tests (the other being the Physical Presence test) that a taxpayer can use to qualify for the Foreign Earned Income Exclusion. By qualifying for the exclusion, a taxpayer can exclude up to $120,000 (2023 figure) of qualifying income from U.S. taxation.
Do I Pass the Bona Fide Residence Test?
To pass the Bona Fide Residence test you must be a resident in a foreign country for an uninterrupted period that covers an entire tax year. This test is tricky because it is based on intent, not just the type of visa you hold or your immigration status in the foreign country.
To pass the Bona Fide Residence test you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be:
- a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Or…
- a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
The term bona fide resident is subjective and depends on your answers to questions such as:
- Am I residing in this country for the long-term (longer than one-year)?
- Is my family living here with me?
- Am I legally authorized to stay in this foreign country?
- Do I own a business or am I employed by a company here?
- Do I participate in the tax and social benefit programs in this country?
- Do I have stronger economic and familiar ties here, than in the United States?
If your answer to these question is yes, then you likely qualify as a bona fide resident of a foreign country. If your answers are mixed, you still may qualify because the test is subjective.
How Do I Establish a Tax Home in a Foreign Country?
To qualify for the Foreign Earned Income Exclusion under the Physical Presence test or the Bona Fide Residence test, you must establish a foreign tax home. This is way easier than it sounds.
The IRS defines your tax home as:your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence…your regular place of abode (the place where you regularly live).
Basically, your tax home is where you regularly live and work. Live and work in a foreign country, your tax home is in a foreign country. With one caveat…
Again, from the IRS:You aren’t considered to have a tax home in a foreign country for any period during which your abode is in the United States.
Alright, got it. I can’t have an abode in the United States… what does that mean? If you own a house, rent it out. If you own a car, sell it or put it in storage. If you have a family or pets, its best to bring them with you. These three things are by no means an exhaustive list, but it’s certainly difficult to argue your abode is outside the United States, if your house and family are still there.
What is an Uninterrupted Period Including an Entire Tax Year?
To pass the Bona Fide Residence test you must be resident and have your tax home in another country for an uninterrupted period covering an entire tax year. You can be a tax resident in one foreign country or multiple places outside the United States. You are also allowed to return to the United States during that tax year, however it must be for a vacation or limited work trip with the intention of returning to the foreign country in which you are resident.
What Can I Do to Qualify for the Bona Fide Residence Test?
Besides establishing your tax home in a foreign country, it is important to take additional steps if you wish to claim yourself as a bona fide resident. For example:
- Ensure you are legally authorized to stay in that country. If you are simply in the country for a 1-year work assignment or on a tourist visa that only covers a few months, you’re not a bona fide resident.
- Do not claim exemptions in your foreign tax home due to not being a permanent resident. If you make any statements to the authorities in the foreign country claiming certain exemptions from their income tax or social insurance systems due to not being a permanent resident, you won’t be able to claim Bona Fide Residence.
- Intend to stay. The Bona Fide Residence test is based almost entirely on intention. If you intend to live in a foreign country, are taking steps to remain in that country, and are paying taxes on your income in that country, you’ll have a strong case for being a bona fide resident. This is true even if some day you wish to return to the United States.
- Minimize Economic Ties in the US. Things that will hurt your claim of being a Bona Fide Resident are maintaining a home or car in the United States, having a spouse and/or children that still reside there, voting in State elections, or listing a United States address for all of your important financial accounts. The IRS may consider the United States as your true abode because you are maintaining strong economic or familiar ties.
- Strengthen Economic Ties in the Foreign Country. Buy a car. Buy a house or sign a long-term lease. Join business and social clubs. Get a library card and learn the language. Register your business.
- Marry a citizen or become one. No better way to prove to the IRS than make a serious commitment! If you marry a citizen of a foreign country or take steps to gain your citizenship, it will be a clear signal of your intentions.
There is no magic answer here, but doing a lot of little things can paint a clear picture that you’re a bona fide resident.
What if I Move in the Middle of the Year?
If you move in the middle of the year (which, let’s face it nobody moves on January 1st) it could be a while before you’ve been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
For example: If you moved to Chile on January 10th, 2023, you won’t have an uninterrupted period of bona fide residence including an entire tax year until December 31st, 2024. Almost two years later.
Don’t worry! This doesn’t mean that you don’t qualify for the Foreign Earned Income Exclusion, just that you’ll have to request an extension and potentially wait a long time to file your tax return (more details on extensions below).
When you do finally file your taxes, the exclusion will be prorated based on the number of days during the tax year which you were a bona fide resident. Therefore, if your first full day as a bona fide resident was July 1st, you may qualify for 50% of the Foreign Earned Income Exclusion ($60,000 in 2023) in that tax year.
To be clear, you still need to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, but once you’ve met that benchmark, the exclusion can be retroactively applied, and prorated, back to your first day of bona fide residence.
What If My Tax Return is Due Before I’ve Been a Bona Fide Resident for an Uninterrupted Period Including a Whole Tax Year?
Not a problem! In fact, most expats don’t file their tax returns on time and they aren’t penalized. American taxpayers outside the country on April 15th receive an automatic extension to file their return until June 15th. This two-month extension is of little help in the first year you become a bona fide resident, so you’ll need to request a further extension. This can be accomplished easily, as the IRS has a specific form just for this situation: Form 2350. With Form 2350 you can apply to extend your deadline to 30 days after you expect to reach an uninterrupted period covering a whole tax year. Unlike some other extensions, Form 2350 is not automatic. It is possible that the IRS will deny your request, so you should submit Form 2350 as early as possible.
It’s also important to note that while an extension provides additional time for you to file your tax return, it does not affect when tax payments are due. In other words, if you expect to owe taxes, payment should be made before April 15th.
Do You Have Questions About the Bona Fide Residence Test? Leave Them in the Comments Below!
Resources and Tax Forms:
- IRS Summary: Bona Fide Residence Test
- IRS Summary: Foreign Earned Income Exclusion
- IRS Form 2555: Foreign Earned Income
- IRS Form 2555: Instructions
- IRS Form 2350: Application for Extension of Time to File U.S. Income Tax Return
- IRS Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Contributions to Individual Retirement Arrangements (IRAs)
