Exceptions to the Bona Fide Residence and Physical Presence Tests

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What Are the Bona Fide Residence and Physical Presence Tests?

When American citizens are living and working abroad, they usually end up having to pay income taxes in the country where they are currently residing. Since they are still American citizens, these people are also under an obligation to file tax returns with the United States. However, the IRS permits citizens who are clearly not living in the US to deduct up to $80,000 of their income under the international tax exclusion so they are not forced to pay taxes twice on a single income.

The IRS has come up with two tests to determine a person's eligibility for this deduction: the bona fide residence test and the physical presence test. Both tests are designed to determine if an American citizen working and living abroad is gone from the United States long enough to justify excluding them from the obligation of having to pay income tax in this country on their income earned abroad. Citizens only need to satisfy one of these tests to qualify for the international income tax exclusion.

Are There Exceptions to the Bona Fide Residence and Physical Presence Tests?

There are two exceptions to meeting the requirements under the bona fide residence and physical presence tests for international tax purposes. They are:

What Is the Waiver of Time Requirement?

Both the bona fide residence test and the physical presence test usually contain minimum time requirements. However, minimum time requirements can be waived if you must leave a foreign country because of:

What Else Do I Have to Show for This Requirement?

You also must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver.

What Does the IRS Mean by U.S. Travel Restrictions?

Living in foreign countries in violation of U.S. travel restrictions will not qualify you as a bona fide resident of a foreign country. Income from sources within such countries does not qualify as foreign earned income. Housing expenses in that country while you are in violation of the law cannot be included in figuring your foreign housing amount. The only country to which this restriction applies to is Cuba, excluding the United States Naval Base at Guantanamo Bay.

Do I Need a Lawyer?

International tax is a complex area of the law that an experienced attorney can help you with. You may want to consult a tax lawyer if you are unsure of your tax qualifications.

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Last Modified: 11-05-2014 03:15 PM PST

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