To claim the foreign earned income exclusion, you must meet all three of the following requirements:
- Your tax home must be in a foreign country
- You must have foreign earned income
- You must be one of the following:
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
There are only two of the factors to be considered in determining whether you pass the bona fide residence test: the length of your stay and the nature of your job. You need to remember that you do not automatically acquire bona fide resident status just by living in a foreign country or countries for one year and your bona fide residence is not necessarily the same as your domicile. If you made a statement to local authorities in your residence country that you are not a resident of that country, and they determine you are not subject to their income tax laws as a resident, you can’t be considered a bona fide resident.
Another test is called the Physical Presence Test and it’s applicable if you are physically present in a foreign country or countries for 330 full days during a period of 12 consecutive months. However, the 330 qualifying days don’t have to be consecutive. This test is based only on how long you stay in a foreign country or countries. It does not depend on the kind of residence that you establish, your intentions to return to the United States or the nature and purpose of your stay abroad. Generally speaking, it means that if you are on vacation, you can count those days in order to pass the physical presence test. However, if you are in a foreign country in violation of U.S. law, then you will not be treated as physically present there and the income that you earn from sources within such a country will not qualify as foreign earned income.
There are four rules that you should know when figuring out the 12-month period:
- Your 12-month period can begin with any day of the month. It ends the day before the same calendar day, 12 months later.
- Your 12-month period must be made up of consecutive months. Any 12-month period can be used if the 330 days in a foreign country fall within that period.
- You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. You can choose the 12-month period that gives you the greatest exclusion.
- In determining whether the 12-month period falls within a longer stay in the country, these 12-month periods can overlap one another.