The Bona Fide Residence Test: To further elaborate upon the foreign earned income exclusion, I’d like to expand upon the other manner in which an individual could qualify for the exclusion: the bona fide residence test.
First, in order to meet the bona fide residence test, an individual must live in a foreign country for an uninterrupted period of time that includes an entire tax year (January 1 – December 31). A taxpayer can, however, leave his or her country of bona fide residence in order to travel back to the United States for brief periods of time.
It is important to note that just because you live in a foreign country for an entire tax year does not mean that you meet the bona fide residence test. For example, let’s assume that you are a construction worker who was sent to work in Switzerland for one entire tax year. You lived in the camps at the construction site and did not integrate into the Swiss culture. Since the length of your stay is only one factor in the bona fide residence test, you would not qualify in this case. However, let’s say that you moved to Spain, brought your wife and children with you, and rented a house. These actions indicate that your stay in Spain appears to be permanent (even though you eventually may plan on returning to the United States). As such, you would qualify for the bona fide residence test in this example as you clearly have attempted to establish your life in Spain.
It’s also important to note that if you claim to be a non-resident of the foreign country to the foreign country’s government and therefore do not pay income taxes to such government, you would not be able to qualify for the foreign earned income exclusion under the bona fide residence test.
Overall, if you plan on living abroad and don’t qualify for the foreign earned income exclusion under the physical presence test, it is important to integrate yourself into the local culture and establish your permanent residence abroad!