Bona Fide Residence Test for Expats
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Have you heard about the Bona Fide Residence Test for expats? It’s an eligibility factor that helps expats save even more money off their US tax returns every year. The bona fide residence test goes hand in hand with another test called the Physical Presence Test, too.
Here is everything you need to know about this vital test for expats:
What is the Bona Fide Residence Test?
According to the IRS, expats can use the Bona Fide Residence Test to be eligible for tax exclusions and benefits like:
- The Foreign Earned Income Exclusion
- The Foreign Housing Exclusion and/or
- The Foreign Housing Deduction
More specifically, the Bona Fide Residence Test tells the IRS you’re a true resident of a foreign country because simply moving or living there will not be enough. There is much more to qualify for the Bona Fide Residence Test if you take advantage of certain expat tax benefits.
If you go to a foreign country to work for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for one tax year or longer. The length of your stay and the nature of your work are only two of the factors to be considered in determining whether you meet the bona fide residence test.
How to Qualify for the Bona Fide Residence Test
Who is eligible for Bona Fide Residence Test?
- You are a US citizen or US resident alien who is a resident of a country with which the US has an income tax treaty.
- Have an established residence in a foreign country.
- Have/are living within your foreign host country for an entire tax year (January 1-December 31)
- No plans to move back to the US soon
Overall, however, the IRS decides whether you qualify as a Bona Fide Residence Test according to what you report on Form 2555, the Foreign Earned Income Exclusion. Therefore, it’s up to the IRS to determine your eligibility.
Who is Not Eligible?
Additionally, expats can’t be eligible for the Bona Fide Residence Test if the following happens:
- You state to the foreign authorities that you are not a resident of your host country
- The foreign authorities do not make you subject to their country’s taxes, or
- The authorities have not finalized your foreign residency and tax status within the country
Bona Fide Residence Test Examples
Need some practical examples of how the Bona Fide Residence Test works? Check this out:
Jeremy was offered a job at foreign company in Portugal. It is indefinite, which means they don’t know how long they will be working there; however, he decided to move there on October 1, 2018. Jeremy established a home, getting an apartment in Lisbon.
In March 2019, he went back to the States to attend a family funeral, arrived back in Portugal in April, and continued living there. January 1, 2020, marks a completed tax year of residence in the foreign country (January 2019-December 2019), so Jeremy qualifies as a bona fide resident for the 2019 Tax Year.
Taking the Portugal example above – if Jeremy was transferred back to the US on September 10, 2019, he would not qualify for the bona fide residence test because he will move back to the US before the whole tax year. However, Jeremy could be eligible for the physical presence test (see more info below) if he still wanted to use the Foreign Housing Exclusion or Deduction.
FAQ on Bona Fide Residence Test
What if I am working temporarily in a foreign country and intend to return to the US?
If you are a resident, have a home for yourself in a foreign country, and lived there for an entire tax year then you should still qualify – even if intend to return to the US in the future.
Can I take trips to the US and still qualify?
If you qualify for the Bona Fide Residence Test for the full tax year, then you can travel to the US as much as you would like. You should have a clear intention to return to your host country to fulfill the status of Bona Fide Residence Test. If you don’t qualify for the Bona Fide Residence Test and opt to use the Physical Presence Test, you will need to limit your US travel accordingly.
I am renting out my home in the US – will this affect my eligibility?
As long as you adhere to a Bona Fide Residence (resident of the foreign country, been there in the foreign country for an entire tax year, etc.), you should be fine and still be eligible.
The Foreign Earned Income Exclusion
In our expat guide, we explain how the Foreign Earned Income Exclusion – or FEIE – is a tax benefit for Americans abroad. Specifically, expats can exclude a large amount of foreign earned income from their US tax return.
For tax season 2020 in 2021, expats can exclude up to $107,600 of foreign earned income. However, foreign currency conversion must be made because the IRS only accepts US dollars on a tax return. Don’t worry – our best-selling expat tax software can easily convert foreign income into USD using the correct IRS rate.
Eligibility for the FEIE
To be eligible for the Foreign Earned Income Exclusion, expats need to pass the Bona Fide Residence Test (as explained in this post) or the physical presence test:
- Physical presence test: You were outside the US for 330 full days within a consecutive 12-month period, beginning or ending in the tax year. Also, you may have to prorate the maximum FEIE amount, depending on your qualifying period.
When you are qualified for the FEIE, you can also be eligible for Foreign Housing Deductions and the Foreign Housing Exclusion (see below). These benefits will help with rent, utilities, and repairs against US taxation.
The Foreign Housing Exclusion and Deduction
The Foreign Housing Exclusion allows US citizens abroad to deduct any excess housing expenses paid by the employer over 16% of that year’s Foreign Earned Income Exclusion (FEIE) amount ($107,600 for the 2020 tax season).
Qualified housing expenses over $16,944 might be eligible for US tax exemption. However, there is a limit to how much foreign housing expenses you can deduct.
Here are some other housing exclusions you could benefit from:
- Home utilities
- Personal property insurance
- Accessory rentals
- Household repairs
The Foreign Housing Exclusion cannot include furniture purchased online, mortgage payments, or domestic labor (a.k.a. house cleaners, maids, etc.).
Qualify for the Foreign Housing Exclusion
Expats will need to pass the Bona Fide Residence Test or the Physical Presence Test to qualify. Once you are eligible for this benefit, you can fill out Form 2555 found in our expat tax software. This will inform the IRS of the test you qualify for to receive the exclusion.
Foreign Housing Deductions
Some foreign housing deduction facts to consider as an American living abroad:
- The housing deduction only impacts amounts paid for people with self-employment earnings.
- Once you choose to exclude foreign housing expenses, you cannot take a foreign tax deduction on excluded income taxes. If you try and bring a deduction, the IRS could revoke your desire to exclude housing expenses.
- The foreign housing deduction cannot reduce self-employment taxes.
US Expat Tax Facts
US Americans and Green Card Holders must report their worldwide earnings to the IRS every year if they reach the tax filing threshold. Plus, if you have over $10,000 total from all foreign financial accounts at any one time during the year, you need to file the Foreign Bank Account Report – known as the FBAR.
Even though you may have to file US taxes, you probably don’t have to pay them. Why? The US has made several agreements with countries all around the world that prevent expats from double taxation. These agreements are called Totalization Agreements and allows you to save on US taxation while still being compliant.
Need More Help with Expat Taxes?
Do you need more help understanding the Bona Fide Residence Test for expats? Our friendly, expert human tax team is ready to assist with any questions you have. Otherwise, you get started becoming fully tax compliant and keep a smile on your face when you file with our MyExpatTaxes award-winning intuitive software!
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