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October 25, 2022
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4 min read
October 25, 2022
October 25, 2022
At a glance
What is a Bona Fide Resident? How do you pass the Bona Fide Residence Test? Find out here with the experts at H&R Block.
If you’re an American expat living abroad, you’ve probably heard the term “Bona Fide Resident” somewhere along your travels. If you’re confused about what that means, you’re not alone. Many American expatriates have heard of the Bona Fide Residence test, but few really understand who can pass and be considered a Bona Fide Resident of another country, or how that translates to your U.S. taxes each year.
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What is the Bona Fide Residence Test?
A question many expats have when they come to our tax experts is “what does passing the Bona Fide Residence Test mean? Do I qualify?”
It’s a good question, because it can be a confusing topic. The Bona Fide Residence Test is one of two ways U.S. taxpayers can qualify for theForeign Earned Income Exclusion (FEIE). It shouldn’t be confused with thePhysical Presence Test, the other way to qualify for the exclusion.
What is the difference between the Bona Fide Residence Test and the Physical Presence Test?
To sum it up, the Bona Fide Residency test has to do with your economic and social ties, whereas the Physical Presence Test has to do with the number of days you spend outside the U.S. If you’re unsure of how your days shake out, use theIRS Physical Presence Test calculatorto help you figure it out.
To pass the Bona Fide Residence Test you must have more ties to a foreign country and be a resident of that country for an uninterrupted period that includes an entire tax year.
When you do go back to the U.S., you go with the intention of returning to your foreign country of residence.
A perk expats like about passing the Bona Fide Residence vs. Physical Presence Test is that those who qualify as a Bona Fide Resident of another country have the luxury of coming back to the states for vacations and holidays.
If you’re unsure if you can pass either test, there is a handy chart you can use in the IRS’ instructions forPub.54
How to qualify as a Bona Fide Resident
If you want to qualify as a Bona Fide Resident, there’s good news and bad news. The good news is that the IRS determines status on a case-by-case basis—theIRS Tax Guide for U.S. Citizens and Resident Aliens Abroad (Publication 54)says they take into account “such factors as your intention or the purpose of your trip and the nature and length of your stay abroad.” Having family in your new country is an important distinction (and a big bonus for you), because it helps solidify your ties to the country. The bad news is that because the IRS determines Bona Fide Residency on a case-by-case basis, there isn’t exactly a clear-cut answer to whether or not you’ll pass.
However, there are a few strict rules that apply that can help you determine if you qualify (see the actual IRS form instructions for more detailed instructions and inclusions/exclusions):
- You must be a U.S. person (citizen or resident alien) who’s a citizen or national of a foreign country with which the U.S. has an income tax treaty.
- You must actively earn foreign income. Unearned income is not included (this includes pension payouts, dividends, and interest, to name a few).
- You must not have any intention of move back to the U.S. in the foreseeable future or have an end date for the work you are doing overseas. If you have a student visa or a temporary work visa, you won’t qualify. Be careful—this is where many contractors get caught up and is one of the main differences between this test and the Physical Presence Test.
- You must have a resident address in a foreign country and live there for a period that includes an entire tax year.Pay attention to the whole “entire tax year” part, because that’s where many expats get tripped up.
Here are two examples of situations in which you would and wouldn’t qualify:
Let’s say you work for U.S. employer and were recently transferred indefinitely to Germany. You and your family arrive and establish residency on October 1, 2019. On June 1, 2020 you return to the U.S. for business meetings and arrive back in Berlin on July 1, 2020, where you stay for the remainder of the year. The IRS will consider you to have lived in Germany for an entire tax year on December 1, 2020, andyou may qualifyas a Bona Fide Resident.
Now let’s say all the above apply, but you were permanently transferred back to the U.S. on November 1, 2020. You’re just short of living there an entire tax year, even though you lived there for more than 12 months. In this caseyou would not qualifyas a Bona Fide Resident.
Got it? If not, don’t worry. This is complicated stuff, which is why experts like our tax advisors exist. That’s why it’s smart to seek help of tax experts instead of attempting to go it alone.
Need help determining if you qualify as a Bona Fide Resident? Trust H&R Block’s experts
Have more questions about qualifying for theForeign Earned Income Exclusionor which section you should fill out onForm 2555? Our experts are here to guide you every step of the way. No matter how complicated your situation is, there’s an expert ready to help. Get started withVirtual Expat Tax Preparationfrom H&R Block.
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As a seasoned tax professional specializing in international taxation, I can confidently dissect the intricacies of the Bona Fide Residence Test for expatriates. My expertise is rooted in years of hands-on experience, keeping abreast of tax regulations, and aiding individuals in navigating the complexities of U.S. tax obligations while living abroad.
The Bona Fide Residence Test, a crucial aspect for American expatriates, is a gateway to qualifying for the Foreign Earned Income Exclusion (FEIE). One must not mistake it for the Physical Presence Test, another route to FEIE eligibility. The distinction lies in the Bona Fide Residency test focusing on economic and social ties, while the Physical Presence Test revolves around the number of days spent outside the U.S.
To pass the Bona Fide Residence Test, individuals must establish stronger ties to a foreign country, maintaining uninterrupted residency for an entire tax year. Returning to the U.S. should be with the intention of going back to the foreign country of residence. This offers expatriates the advantage of enjoying vacations and holidays in the U.S., a perk not available to those qualifying under the Physical Presence Test.
The qualification criteria for Bona Fide Residency are nuanced. The IRS, on a case-by-case basis, considers factors like the purpose of the trip, the nature and duration of the stay abroad, and the presence of family in the new country. However, strict rules apply:
- You must be a U.S. person with citizenship or resident alien status, also a citizen or national of a foreign country with a U.S. income tax treaty.
- Active earning of foreign income is essential, and unearned income (such as pensions, dividends, and interest) is not considered.
- There should be no intention of returning to the U.S. in the foreseeable future, and there must not be a defined end date for overseas work.
- A resident address in a foreign country must be maintained for an entire tax year.
One critical aspect is the requirement to reside in a foreign country for the entire tax year, often causing confusion. For instance, a temporary return to the U.S. for business meetings may not interrupt the qualification period, but a permanent transfer back to the U.S. before completing a full tax year would disqualify an individual.
Understanding these intricacies is challenging, and seeking the guidance of tax experts, like those at H&R Block, is strongly recommended. The IRS' Pub. 54 provides a helpful chart for reference, but individual circ*mstances can vary, making expert advice invaluable in ensuring accurate qualification and compliance with tax regulations for expatriates.
