For Americans living abroad, understanding the IRS’s definition of a “bona fide resident” is crucial for navigating American taxes, especially if you want to take advantage of tax benefits like the Foreign Earned Income Exclusion (FEIE) and the Foreign Housing Exclusion. Establishing bona fide residency can significantly impact your tax obligations and potential exclusions.
Bona Fide Residence Test
The IRS uses the Bona Fide Residence Test to determine whether a US citizen or resident alien can be considered a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. This status allows you to claim the Foreign Earned Income Exclusion and other related benefits.
Key Criteria for Bona Fide Residency
To qualify as a bona fide resident, you must meet several criteria:
- Uninterrupted Period: You must be a resident of a foreign country or countries for an entire tax year (January 1 to December 31). Short trips back to the US or other countries for vacations or business do not necessarily break your period of residence.
- Intention of Residency: Your intention to stay in the foreign country must be long-term or indefinite. Temporary assignments or short stays do not typically qualify you as a bona fide resident.
- Nature and Purpose of Stay: The IRS will consider the nature and purpose of your stay in the foreign country. Factors like your job, visa status, family situation, and community involvement will be assessed.
- Not Seeking Exclusion as a Nonresident: You cannot qualify as a bona fide resident if you have submitted a statement to the authorities of the foreign country that you are not a resident of that country, and the authorities have accepted that statement.
Factors the IRS Considers
The IRS looks at several factors to determine if you meet the Bona Fide Residence Test. These factors include, but are not limited to:
- Length and Nature of Stay: How long you have lived in the foreign country and the purpose of your stay.
- Type of Visa: The visa under which you are staying in the foreign country.
- Employment Agreement: The nature of your employment agreement, such as whether it is permanent or temporary.
- Establishment of a Home: Whether you have established a home in the foreign country.
- Participation in Community: Your participation in social, cultural, and other activities in the foreign country.
- Intention to Return to the US: Your intention to return to the US and whether you maintain a home in the US.
Examples of Bona Fide Residency
To better understand bona fide residency, let’s consider a few examples:
Example 1: Long-Term Employment
John, a US citizen, moves to Germany for a long-term job assignment. He signs a two-year contract with his employer and rents an apartment in Berlin. John participates in local community activities, registers with local authorities, and has no plans to return to the US until his contract ends. John meets the Bona Fide Residence Test.
Example 2: Temporary Assignment
Sara, a US citizen, is sent to Japan for a six-month project by her US-based employer. She lives in a company-provided apartment and plans to return to the US once the project is completed. Sara does not meet the Bona Fide Residence Test because her stay in Japan is temporary and does not cover an entire tax year.
Example 3: Indefinite Stay
Michael, a US citizen, relocates to Australia to start a business. He rents a house, enrolls his children in local schools, and becomes active in the community. Michael has no definite plans to return to the US. Michael meets the Bona Fide Residence Test due to his indefinite stay and integration into the local community.
Filing Requirements and Forms
To claim the Foreign Earned Income Exclusion and demonstrate that you meet the Bona Fide Residence Test, you must file Form 2555, Foreign Earned Income, along with your annual US tax return. The form requires detailed information about your stay in the foreign country, including dates, income, and other relevant details.
Being classified as a bona fide resident by the IRS can provide significant tax benefits for Americans living abroad. It requires an uninterrupted, indefinite stay in a foreign country, along with evidence of your intention to make the foreign country your home. By understanding the criteria and factors the IRS considers, you can better position yourself to meet the Bona Fide Residence Test and take advantage of the available tax exclusions.
