While managing their US expat taxes, many expats encounter a crucial question: What is a bona fide resident?
For expats filing taxes, the term refers to a qualifying test under a common IRS tax provision that US citizens and Green Card holders can use to offset their US tax liability. This is good news because according to a CBS News/YouGov survey, over 60% of Americans believe they’re paying more than their fair share on their US tax return.1
This issue is especially relevant for US expats, who are often surprised to learn that they typically must continue filing US tax returns. That said, American citizens and permanent residents can benefit from IRS tax savings while living abroad to avoid double taxation if they pass the Bona Fide Residence Test.
In this article, we answer common questions from our clients about the Bona Fide Residence Test, situate it within the context of the broader FEIE, and more.
What is the Bona Fide Residence Test?
The IRS’s Bona Fide Residence Test verifies that you’ve established residency in another country. You must pass the Bona Fide Residence Test to qualify for the Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE).
According to the IRS,2 “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, the entire tax year is from January 1st through December 31st.”
Bona Fide Residence Test vs. Physical Presence Test: What’s the difference?
It’s essential not to get the Bona Fide Residence Test confused with the Physical Presence Test. While both tests help you qualify for the IRS tax exemption programs and avoid double taxation, they have different requirements.
The Bona Fide Residence Test relates to the social and economic ties you establish with your new home country. This means you should have already established permanent residency in a country, with no immediate plans to return to the US.
On the other hand, the Physical Presence Test only has to do with the number of days you spend outside the US. To pass the test, you need to spend more than 330 full days overseas within a 365-day period, which does not necessarily have to align with the tax year. The IRS provides a specific resource to learn more about this test.
Taxpayers qualifying under the Bona Fide Residence Test – Form 2555
There’s no guarantee of passing the Bona Fide Residence Test, as the IRS reviews each case individually to determine bona fide residency. However, the primary requirements to qualify for the Bona Fide Residence test are as follows:
- Have established residence in a foreign country of your choice.
- Actively earn foreign income in your new country of residence. Unearned income such as dividends or pensions doesn’t count.
- Have no immediate plans to return to the US. For example, if you have a student visa, you won’t be able to qualify for bona fide residence.
- Have proof of a foreign address or permanent home. Documents such as utility bills and rental contracts will help your case.
- Have resided in your new home country for a full tax year (i.e., the calendar year).
Other things that aren’t necessarily requirements but will help you qualify as a bona fide resident include documents such as proof of paying foreign income tax or an employment contract. If you have family members in your new home country, it will also help to prove that you’ve permanently made your new life abroad.
Can I still travel to the US as a bona fide resident?
As a bona fide resident, you can return to the US for vacation without worrying too much about disqualifying yourself for the test. However, make sure to monitor the length of your stay. It is advisable to avoid spending excessive time in the US during the tax year or engaging in activities that could indicate an intention to return to the US. For example, buying a personal residence may jeopardize your bona fide resident status.
Bona Fide Residence Test Examples
To help better understand the Bona Fide Residence Test, we’ve included two examples of when an expat might (or might not) qualify as a bona fide resident abroad:
You landed a job at a company based in the UK and moved to London in August 2020. The opportunity was initially planned to be a three-month, temporary position. But, as often happens, you fall in love with expat life and negotiate a permanent position, deciding to purchase a home in the UK in December 2020.
In April of 2021, you went back to Chicago, Illinois (where you used to live before moving to the UK) for one week to visit friends and family. You returned to London right after that week and remained in the country for the rest of the year.
In this case, you spent an entire tax year (January 2021 – December 2021) in the UK. As a result, you may qualify for bona fide residence in the eyes of the IRS.
Your US-based tech company transferred you to Switzerland in August 2020. You rent a home in the country and enjoy your new life in Switzerland until your company decides to move you back to the US in October 2021.
While you did spend more than a year in Switzerland, you didn’t spend an entire tax year within a 12-month period in the country. In this scenario, you would not qualify for bona fide residence.