Bona Fide Residency Test

/Bona Fide Residency Test
Bona Fide Residency Test2019-01-18T21:36:27+00:00

To meet the bona fide residence test, you must have established such a residence in a foreign country. The bona fide residence test applies to U.S. citizens and to any 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.

The term “foreign country” does not include U.S. possessions such as Puerto Rico, Guam, and the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. The term “foreign country” does not include ships and aircraft traveling in or above international waters, nor does it include offshore installations which are located outside the territorial waters of any individual nation.

To qualify as a bona fide resident – you must establish residency in the foreign country. The IRS refers to Tax Home when discussing this deduction. They state in tax code that: You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties. (Title 26, sub-title A, Chapter 1, Sub-Chapter N, Part 3, Section 911, Paragraph 3,)

Example: You accept a contract with a foreign carrier based in Dubai. You are provided with an apartment to live in on your days off. Your wife and children remain in the United States. On days off of any duration, you return home to the U.S. All of your personal items, heirlooms, photographs, golf clubs, boat etc. are located in the U.S. as are your bank, investment and retirement accounts. In this example, you do not qualify for foreign income exclusion. We are not able to prove that we have established a residency which qualifies as an “abode”.

The intent of this law is to provide tax relief to those people living abroad who do not reside or earn their income in the U.S. It is argued that they are not taking advantage of public services in the U.S. and should not be required to pay income tax to support these services and benefits. When we look at this “intent” it is obvious that the above example does not qualify for the earned income exclusion.

The other determining factor for this test is duration. You must be a bona fide resident of a foreign country for one entire tax year, January 1 to December 31 of any year. For example, if you were based abroad in July of 2018, your qualifying period doesn’t even start until January 1 of 2019 and will not be completed until January 1 of 2020. There is a special extension that we file in this situation with the IRS to grant an extension of time until the qualifying period can be met. If any tax is to be due on the return, it must be paid in a timely manner – April 15 of the following year. We would calculate your return under the assumption that you will be meeting the requirement. Once you have met this requirement, your return is then simply sent to the IRS for filing. If you should not meet the duration requirement, your return would be recalculated without the foreign income exclusion. If you have any questions on this process—please call, we will be happy to discuss it with you.