Bona Fide Residence Test & US Expatriate

By ZM Ishmurzina

Any US expatriate moving overseas must be aware of the Bona Fide Residence Test. The main purpose of this test is to determine whether you can claim several deductions to minimize your US tax liability. Foreign Earned Income Exclusion is one of these deductions. There are several requirements that an expatriate from the US should meet in order to pass this test. The fact that a US expatriate moved overseas does not qualify him automatically for this test. An expatriate must carefully review all requirements since there are several exceptions.

Qualifications for Bona Fide Residence Test

You must meet each of the following requirements to qualify as a bona fide resident.

  • You must be a US citizen or a US resident alien of a country that has a tax treaty with the USA.
  • You must have a tax home in a foreign country.
  • You must be a resident of a foreign country for the whole year.
  • You intend to live in your country of residence and do not plan to move back to the USA immediately.

Although the above criteria sound to be easy and straightforward, US expatriates find the requirement of not returning back to the USA unclear. Please find below some real-life situations that we came across at Artio Partners.

  • Example 1. An expatriate from the US buys a home in Saint Tropez and hopes to spend 7 months in France. Unfortunately, this person does not qualify for the Bona Fide Residence Test because he has a permanent home in the USA. His French home is considered a vacation home.
  • Example 2. A multinational company sends a US expatriate to Hong Kong on a two-year assignment. This expatriate does not qualify as a Bona Fide Resident because he intends to come back to the USA.
  • Example 3. An expatriate from the US has a wife and 3 children. He moves his entire family to Dubai on January 1, 2011 and buys a house. His kids attend a local school and his wife helps a local charity in Dubai. His company sends him back to the USA for training. While he is going through training, his family stays in Dubai. On January 1, 2012 he will meet the requirements of the Bona Fide Resident. As a result of it he can claim not only the Foreign Earned Income Exclusion but also the Foreign Housing Exclusion and Foreign Tax Credit.
  • Example 4. Your family comes from Cuba so you decided to move and live permanently in Cuba. Unfortunately, residing or working in Cuba does not qualify a US expatriate for the Bona Fide Residency Test.

Conclusion

Any US expatriate must carefully review whether s/he meets the requirements of the Bona Fide Residence test since it can help minimize a US tax liability. It is important to remember that an American expat must not have an immediate intention to come back to the USA to qualify for this test. Additionally, the form 2555 must be correctly prepared per the IRS instructions. Each individual situation is unique so if you are not sure about your tax issues, you should contact an expatriate tax professional.