For some Americans moving abroad, filing taxes as an expat is the furthest thing from your mind. On the other hand, other Americans may already be researching how to claim the Foregin Earned Income Exclusion in preparation for their big move (more on this shortly!).
No matter where you fall on the spectrum of preparedness for filing US taxes as an expat, if you’re planning to join the 9 million Americans who live outside the country, you’re going to have to file. But truly, no judgment. Between choosing a destination, arranging travel, securing housing, packing your bags, and the million little details that go into realizing the dream of living abroad, that once-a-year obligation to the IRS is easy to put on the backburner.
That said, unless you’re planning to align your move with the IRS’ calendar year (January 1 – December 31), you’ll need to consider the implications moving abroad mid-year will have on your tax filing obligations.
US taxes and living abroad
US citizens and US residents pay tax on their worldwide income, while non-residents are subject to income tax only if the income is US-sourced or connected with a US business or trade.
If you plan to establish residency abroad as an American expat, there are ways to make sure you’re not taxed twice on the same income (by two different countries).
Fortunately, it’s also possible to strategically plan your mid-year move so that you qualify for the Foreign Earned Income Exclusion (FEIE). There are two main provisions within the FEIE that allow a taxpayer to claim relief, the Physical Presence Test and the Bona Fide Residence Test. In this article, we’ll be focusing on the Physical Presence Test, or the PPT.
Save for later: What Is The Bona Fide Residence Test?
How to claim the FEIE using the Physical Presence Test (PPT)
As mentioned, the Physical Presence Test is one of two ways Americans residing outside the US can claim the Foreign Earned Income Exclusion. If this is your first year living abroad, it’s likely easier to use the PPT to claim the FEIE.
What are the Physical Presence Test requirements?
-Be physically present in a foreign country or countries
-Remain outside of the States for 330 full days during any 365-day period
Qualifying for the FEIE via the PPT sounds simple, but it’s more complex than counting how many days you spend outside the US. That being said, you will want to keep a careful tabulation of the total number of days spent outside the US, because the 330 days don’t need to be consecutive. And, in a stroke of good fortune for those who moved abroad mid-year, the 365-day period doesn’t need to follow the calendar year!
Note: While you can count the number of days you spend overseas for different reasons (vacation, employment, etc.), some situations would disqualify you from meeting the PPT, specifically:
If your presence abroad violates US law, any income you earn during the violation period won’t qualify as foreign-earned income.
How is the Physical Presence Test evaluated?
To calculate the days required to pass the PPT, you must prove that you were physically present outside of the US:
-For 330 full days
-In an eligible foreign country
-Within a period of 365 consecutive days
How the IRS defines 330 full days
US expats trying to file their tax returns commonly ask: “If I live abroad for 330 days, do I automatically qualify for the Foreign Earned Income Exclusion?”
A full day is 24 consecutive hours (from midnight to midnight), that you spend in a foreign country or countries. This means the day you depart the US or land in a foreign country does not count towards the 330 days
Take careful note: This does not include time spent on or over international waters traveling to and from the US.
Here is an example of how to count days towards passing the Physical Presence Test
Suppose you’ve embarked on a trip as a digital nomad. You plan to spend several months in Europe and will start your adventure in Italy.
You leave the US for Italy on August 19, 2022, and arrive in Italy on August 20, 2022, at 7:00 AM. Your first full day in Italy counted for the Physical Presence test is August 21, 2022.
After a few wonderful months in Italy, you pack up and head to Greece. You catch an 11:00 p.m. flight on December 3, 2022 and arrive in Greece at 4:00 a.m. on December 4, 2022.
Since your trip took less than 24 hours, and you were not traveling to the US, you can count both December 3rd and December 4th as full days towards your 330-day requirement.
So far, in this example, the total number of days that count towards the 330 required for the Physical Presence Test is 106 days. This also assumes your only travel has been local and has not exceeded 24 hours. At this point, you do not qualify for the FEIE through the Physical Presence Test; you must spend at least another 224 days outside the US.
Common question when calculating days that count towards meeting the Physical Presence Test: What happens if your travel takes longer than 24 hours?
After staying in Greece for three months, you head to New Zealand to take advantage of their working holiday visa. You leave Greece at 11:00 p.m. on March 5, 2023 and arrive in Auckland, New Zealand at 8:00 a.m. on March 7, 2023. Although your travel takes more than 24 hours, March 5, 6, and 7 still count towards the PPT because the travel did occur between foreign countries. At this point, you have spent 200 days total outside of the US – so you still have 130 days to go before you qualify for the FEIE through the Physical Presence Test.
Fortunately, your New Zealand visa is valid for an entire year. You spend an unforgettable two months working the annual harvest on a famous vineyard in the Marlborough Region, and proceed to slow travel in a campervan down and around the rest of the South Island before making the journey back up to Auckland for a US-bound departure on November 20, 2023, which will have you back home just in time for Thanksgiving.
At this point, you’ve spent well beyond the 330 days required to qualify for the PPT – but you’ve hypothetically also had to file your 2022 taxes prior to your November departure. How does one calculate which days count towards which filing season? Here is where it becomes tricky, but also possibly, to strategically identify the most advantageous 12-month period from a tax perspective.
How to figure the 12-month period
There are four things to know about the consecutive 12-month period.
- A 12-month period can begin on any day of the month.
- A 12-month period must be made up of consecutive months (e.g., November 15, 2021 to November 14, 2022)
- You don’t need to start your 12-month period on your first full day in a foreign country, and you don’t need to end it with the day you leave. You can choose the period that gives you the greatest exclusion.
- If you’re in a foreign country for a longer period (e.g., more than two years), 12-month periods in different tax returns can overlap each other.
Let’s look at the 4th item in more detail with another example that will help lead us into the mid-year move scenario.
Suppose you live and work in Australia from January 1, 2021, through August 31, 2022.
You spend 28 days in February 2021 and 28 days in February 2022 on vacation in the United States.
You are present in Australia for at least 330 full days during each of the following two 12-month periods:
-January 1, 2021 – December 31, 2021, and
-September 1, 2021 – August 31, 2022.
Your qualifying 12-month period for your 2021 tax return is January 1, 2021 – December 31, 2021.
For the 2022 tax return, you may choose September 1, 2021 – August 31, 2022, as your qualifying period.
Moving abroad in the middle of the year
-Your first full day living in Australia is September 15, 2021.
-You’re still living in Australia on December 31, 2022.
-You earn $150,000 a year from your Aussie employer.
-The FEIE for 2021 is $108,700 and for 2022 is $112,000.
For the 2021 tax year, you can use the September 15, 2021 to September 14, 2022 period as your qualifying 12-month period.
Since that overlaps two tax years, you’ll prorate the income you can use for the FEIE.
2021 Prorated Foreign Earned Income Exclusion:
|% of time in Australia in 2021||29.2% (3.5 months / 12 months)|
|Annual income that can be excluded in 2021||$43,800 ($150,000 x 29.2%)|
|Annual income subject to tax||$106,200 ($150,000 – $43,800)|
2022 Prorated Foreign Earned Income Exclusion:
|% of time in Australia in 2022||100%|
|Annual income that can be excluded in 2022||$112,000|
|Annual income subject to tax||$38,000 ($150,000 – $112,000)|
I think I pass the Physical Presence Test – what next?
Passing the PPT can be tricky, especially if you moved in the middle of the year and are trying to figure out how to calculate your full days and 12-month period to qualify.
If you’re new to the process, you can take these proactive steps to ensure that your tax bill is maximally minimized:
-Track your travel time carefully, saving all records of travel in a secure location (digitally or physically), including flight tickets and travel itineraries.
-File a US tax extension if you need more time to meet the PPT requirements and file Form 2350.
-Consult with one of our Bright!Tax CPAs for professional guidance. Our professionals have decades of combined experience living abroad and working with US expats to ensure tax compliance and filing confidence. We’d love to help you!