Bona Fide Residence vs. Physical Presence Test
The information on this website is not intended to provide you with enough information for you to prepare your own tax return, it is provided for the sole purpose of helping clients to fill-out their tax organizers for submission to my office.
To qualify for the foreign earned Income exclusion and the foreign housing exclusions or deductions you will need to qualify for either the bona fide residence test or the physical presence test.
The rules that qualify a taxpayer for the bona fide residence are not well defined because the IRS decides on a case by case basis and you do not automatically acquire bona fide resident status merely by living in a foreign country for 1 year. The IRS will use Form 2555 to decide if you qualify. There are a series of questions in Part II designed to give the IRS enough information to determine your intentions. The bona fide residence, if you qualify, is best because your time traveling outside of your resident country shouldn’t affect your qualification (after the first year) whereas the physical presence test requires you be present in the “foreign” state for at least 330 days during any period of 12 months in a row. If you go to a foreign country to work for a specified period of time (instead of an indefinite period of time) you ordinarily will not be regarded as a bona fide resident even though you work there for 1 year or longer, you will likely need to use the physical presence test to claim the foreign earned income exclusion.
When figuring the 330 days to meet the physcial presence test taxpayers are not restricted to the 12 months in the year of taxation. The 12-month period on which the physical presence test is based must include 365 days, part of which must be in 2015, but the beginning or ending may be in a different year than the tax year you are filing for and may overlap previously reported days.
It is unwise to attempt to qualify for both bona fide residence and physical presence test in the same year therefore our combined due diligence in this area is key to success.