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FEIE: What is the Bona Fide Residence Test?

February 16, 2021

The IRS has 11 factors it considers when determining whether a taxpayer is a bona fide resident of a foreign country including the intention of the taxpayer, physical presence in the country and more. Here’s what you need to know.

The Foreign Earned Income Exclusion (FEIE) is the low-hanging fruit of the U.S. expat tax world, but it isn’t always the best choice for U.S. taxpayers abroad. Here are a few questions you should consider before taking the FEIE.

In our 2nd blog in our FEIE series, we explore the bona fide residence test. Wondering if you qualify for the foreign earned income exclusion? It depends on two tests- the physical presence test or the bona fide residence test. Here’s what you should be aware of.

What is the foreign earned income exclusion?

Check out our blog, Should You Use the FEIE? Essentially, it is an amount that you can deduct from your total income to reduce the U.S. tax on your Federal income tax return. You report your foreign earned income (wages or self-employment) and then make a negative adjustment for up to $107,600 (tax year 2020) per person, potentially more if you claim housing expenses or deductions.

What are the rules?

First rule:

You must have a foreign tax home, a regular place of business in a foreign country or your abode is in a foreign country.

Second rule:

You must pass either the

  1. Physical Presence Test – 330 days outside the U.S. in a 365 period, or
  2. Bona Fide Residence Test (BFR) – based on facts and circumstances.

Below are the factors the IRS considers when determining whether a taxpayer is a Bona Fide resident of a foreign country.

  1. The intention of the taxpayer. Weight = heavy.
  2. Establishment of his home temporarily in the foreign country for an indefinite period.
  3. Participation in the activities of his chosen community on social and cultural levels, identification with the daily lives of the people and, in general, assimilation into the foreign environment.
  4. Physical presence in the foreign country consistent with his employment.
  5. Nature, extent and reasons for temporary absences from his temporary foreign home.
  6. Assumption of economic burdens and payment of taxes to the foreign country.
  7. Status as resident contrasted to that of transient or sojourner. Weight = heavy.
  8. Treatment accorded his income tax status by his employer.
  9. Marital status and residence of his family.
  10. Nature and duration of his employment; whether his assignment abroad could be promptly accomplished within a definite or specified time.
  11. Good faith in making trip abroad; whether for purpose of tax evasion.

Need more guidance? We’re always here to help.

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