For US citizens living abroad, understanding the requirements to qualify for tax benefits such as the Foreign Earned Income Exclusion (FEIE) is very important. One of the two key tests that help determine eligibility for this exclusion is the Physical Presence Test. This test allows US expats to exclude foreign-earned income from US taxes if they meet certain conditions.
What is the Physical Presence Test?
The Physical Presence Test is designed to provide a tax benefit to US citizens who live abroad and meet specific criteria regarding their physical presence in foreign countries. Unlike the Bona Fide Residence Test, which evaluates whether you are a permanent resident in a foreign country, the Physical Presence Test is based on the number of days you spend outside the United States within a 12-month period.
To qualify for the Foreign Earned Income Exclusion (FEIE) using the Physical Presence Test, a US citizen must be physically present in one or more foreign countries for at least 330 full days during any 12-month period.
Key Requirements for the Physical Presence Test
To pass the Physical Presence Test, a US citizen must meet the following conditions:
330 Full Days: The taxpayer must be physically present in one or more foreign countries for at least 330 full days during a 12-month period. A “full day” is defined as a 24-hour period spent outside the United States. The days do not need to be consecutive, but the total must reach 330.
12-Month Period: The 12-month period used for the test can be any consecutive 12-month period that the taxpayer chooses. This is a flexible requirement, as it allows individuals to choose the period in which they meet the 330-day requirement, without needing to align it with the calendar year.
No US Presence: To qualify for the test, the taxpayer must be physically outside the US for at least 330 days. A day spent in the US, even if it is just for a few hours, does not count as part of the 330-day total. The taxpayer must be outside the US for the entirety of the day.
Foreign Country Definition: The test applies to time spent in foreign countries, not the US. Days spent in US territories (such as Puerto Rico or Guam) or on ships in US waters do not count toward the Physical Presence Test. However, any day spent physically in a foreign country is counted, even if it’s a partial day (e.g., arriving late at night).
Qualifying Days: The test is based on the days spent physically present in a foreign country. This includes not only working abroad but also traveling or vacationing outside the US. As long as the individual is outside the US, the days count toward the 330-day total. However, there are certain exceptions, such as days spent in international waters or airspace, that may not count.
No Requirement for Permanent Residency: Unlike the Bona Fide Residence Test, the Physical Presence Test does not require the taxpayer to have permanent residency in the foreign country. It only examines the physical presence of the taxpayer abroad.
Filing FEIE under the Physical Presence Test
To claim the Foreign Earned Income Exclusion using the Physical Presence Test, US citizens must file Form 2555, Foreign Earned Income, with their tax return. This form helps determine whether the taxpayer meets the test and qualifies for the exclusion.
Common Misconceptions About the Physical Presence Test
There are a few common misconceptions surrounding the Physical Presence Test that it’s important to clarify:
- Partial Days Don’t Count: The IRS counts “full days,” so any partial days spent in a foreign country do not count toward the 330-day total. For instance, if you travel from the US to a foreign country in the middle of the day, only the next full day spent abroad counts as the first “full day” abroad.
- Short Visits to the US Are Allowed: A US citizen can return to the US for up to 35 days during the 12-month period without losing eligibility for the Physical Presence Test. However, if the time spent in the US exceeds 35 days, the taxpayer may no longer qualify for the exclusion.
The Physical Presence Test is a straightforward and effective way for US citizens living abroad to qualify for the Foreign Earned Income Exclusion. By ensuring that you spend at least 330 full days in a foreign country within any consecutive 12-month period and limiting your time in the US, you can reduce your taxable income and avoid paying US taxes on your foreign-earned income. If you’re uncertain about how to track your days or whether you qualify for the exclusion, feel free to contact Universal Tax Professionals today.
