Foreign Earned Income Exclusion - Bona Fide Residence Test

 

You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. If you are a calendar year taxpayer, an entire tax year is from January 1st through December 31st. During your period of bona fide residence in a foreign country, you may leave that foreign country for brief or temporary trips back to the United States or elsewhere so long as you clearly intend to return to your foreign residence or to a new foreign bona fide residence without unreasonable delay. 

Once you establish bona fide residency in a foreign country for an uninterrupted period that includes an entire tax year, you will qualify as a bona fide resident starting with the date you began the residency and ending with the date you abandon your foreign residence. This means you could qualify as a bona fide resident for parts of one or two other tax years in addition to the full tax year(s) of bona fide residency.

You can use the bona fide residence test to qualify for the foreign earned income exclusion, the foreign housing exclusion and/or the foreign housing deduction only if you are either:

  • A U.S. citizen, 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.

You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for one year.

Example:

If you go to a foreign country to work for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for one tax year or longer. The length of your stay and the nature of your work are only two of the factors to be considered in determining whether you meet the bona fide residence test.

Bona Fide Residence

The bona fide residence test applies to U.S. citizens and to any 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.

To see if you meet the test of bona fide residence in a foreign country, you must find out if you have established such a residence in a foreign country. If you go there to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States.

Determination

Whether you are a bona fide resident of a foreign country is determined by the facts of your situation and may include such factors as your intention or purpose for being in the foreign country, your activities in the foreign country, and whether you paid taxes to the foreign country, among other things. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555, Foreign Earned Income. The IRS cannot make this determination until you file Form 2555. You must also show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (which may be the year before or after the year in which you claim a tax benefit for your time abroad; see instructions for Form 2555 for details on how to file your return if the current year is the short year preceding your anticipated full year abroad).

Statement to Foreign Authorities

You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country and the authorities hold that you are not subject to their income tax laws as a resident. If you have made such a statement and the authorities have not made a final decision on your status, you are not considered to be a bona fide resident of that foreign country.

Special Agreements and Treaties

An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities.

Uninterrupted Period Including Entire Tax Year

To qualify for bona fide residence, you must reside in a foreign country for an uninterrupted period that includes an entire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.

To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.

Example 1:

You are the Lisbon representative of a U.S. employer. You arrived with your family in Lisbon on November 1, 2018. Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. You immediately established residence there. On April 1, 2019, you arrived in the United States to meet with your employer, leaving your family in Lisbon. You returned to Lisbon on May 1, and continue living there. On January 1, 2020, you completed an uninterrupted period of residence for a full tax year (2019), and you may qualify as a bona fide resident of a foreign country.

Example 2:

Assume that in Example 1, you transferred back to the United States on December 13, 2019. You would not qualify under the bona fide residence test. Although your stay in the foreign country lasted more than a year, it did not include a full tax year. You may, however, qualify for the foreign earned income exclusion and the foreign housing exclusion or deduction under the physical presence test.

Bona Fide Resident for Part of a Year

Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you will qualify as a bona fide resident for the period starting with the date you began your residency there and ending with the date you abandon the foreign residence. You could qualify as a bona fide resident for an entire tax year plus parts of 1 or 2 other tax years. See instructions for Form 2555 for details on how to file your return if the current year is the short year preceding your anticipated full year abroad.

Example:

You were a bona fide resident of England from March 1, 2017, through September 14, 2020. On September 15, 2020, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2018, you also qualify as a bona fide resident from March 1, 2017, through the end of 2017 and from January 1, 2020, through September 14, 2020.

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