US citizens and green card holders living abroad have to file overseas returns and to comply with tax filing requirements in a country of residence. However, American expats residing overseas face an additional layer of complexity. US persons are subject to the worldwide taxation whether they live in Houston or Beijing. To avoid double taxation, American expatriates can claim the Foreign Earned Income Exclusion, Foreign Housing Exclusion or Foreign Housing Deduction. In order to claim any of these exclusions on US expat tax returns, US taxpayers must meet the Physical Presence Test or Bona Fide Residence Test. The purpose of this article is to provide an overview of Bona Fide Residence Test.
Key Rules of Claiming Bona Fide Residence Test
How to meet the bona fide residence test?
American expats living abroad must meet several requirements to meet the bona fide test.
- US citizen. A taxpayer must be a US citizen to be eligible.
- US resident alien. US resident alien can meet this test, if s/he is a citizen or national of a country that has an income tax treaty with the United States.
- American expat must be a bona fide resident of a foreign country for an uninterrupted period of one calendar year. US tax year is from January 1 to December 31.
Who is a bona fide resident?
American expats are not automatically considered bona fide residents by simply living in a foreign country for an entire year. For example, visiting London as a tourist or moving to Brussels, Barcelona or France does not qualify a US taxpayer as a bona fide resident.
To qualify as a bona fide resident, American expats must meet the following criteria:
- American expats must establish a tax home or residency in a foreign country.
- US taxpayers must reside in a foreign country for an uninterrupted period of entire tax. year.
- American expats residing in a foreign country cannot make a statement to the foreign authorities that they are not residents of a foreign country. Also, foreign authorities cannot hold that a taxpayer is not subject to income tax laws as a resident.
What is a tax home in a foreign country?
US citizens and green card holders must have a tax home in a foreign country during the period of bona fide residency. The Internal Revenue Service has provided clear guidelines in regards to a foreign country. The foreign country includes not only the territory but also territorial waters, seabed and subsoil of submarine areas that are under the jurisdiction of a foreign country. Moreover, a foreign country does not include US possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. The international waters are not considered a foreign territory.
A tax home is the place of employment, main place of taxpayer’s business or post of duty. In case of American expats who do not have a permanent place of work, then their tax home is a place where they live. For example, John, an international assignee, moved to Geneva for work. His spouse and 2 children joined him. The spouse has become a member of several women organizations. Their children go to a local school. John has lived in Geneva for 2 years. In this scenario he established a tax home in a foreign country and he is a bona fide resident. He is eligible to claim the foreign earned income exclusion and foreign housing exclusion or deduction.
Is a bona fide residence test automatic?
Whether an American expat meets the bona fide resident test depends on the individual circumstances. For example, the nature, duration and purpose of staying abroad help determine whether a US taxpayer is a bona fide resident.
American expats living abroad must review all circumstances before filing an expatriate tax return. Bona fide residence test gives a lot of flexibility to Americans living abroad, however, it is essential to meet all expat tax requirements. Expat tax experts at Expattaxcpaservices.com will be pleased to assist you so please contact us for assistance.