Bona Fide Residence Test
To expand upon what you have read about on the foreign earned income exclusion page. We will elaborate on the Bona Fide Residence Test. It is one of the two tests to qualify for the foreign earned income exclusion.
Uninterrupted Period Including Entire Tax Year
You meet the test if you are a bona fide resident of a foreign country for an uninterrupted period of time. The uninterrupted period of time must include an entire tax year (January 1 – December 31).
During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the U.S. Or, elsewhere for vacation or business. To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips. In other words, without unreasonable delay back to your foreign residence or to a new bona fide residence in another foreign country.
Above all, it is important to note that just because you live in a foreign country for an entire tax year does not mean that you automatically meet the bona fide residence test.
If you go to Afghanistan to work on a particular construction job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country. Even though you work there for 1 tax year or longer. The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the test.
Only U.S. Citizens Or Resident Aliens Can Qualify For The Bona Fide Residence Test
The bona fide residence test applies to U.S. citizens. Most importantly, for a resident alien to qualify, they must be a citizen or national of a country with which the U.S. has an income tax treaty in effect. Therefore, if you are a resident alien, you must determine if a treaty exists.
To see if you meet the bona fide residence test in a foreign country; you must find out if you have established such a residence in a foreign country. Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.
For example, you could have your domicile in Las Vegas, Nevada, and a bona fide residence in Paris, France if you intend to return eventually to Las Vegas. The fact that you go to Paris does not automatically make Paris your bona fide residence.
If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Paris. But, if you go to Paris to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family; you probably have established a bona fide residence in a foreign country; even though you intend to return eventually to the United States. You are clearly not a resident of Paris in the first instance (going as a tourist).
However, in the second (going for an indefinite work assignment), you are a resident because your stay in Paris appears to be permanent. If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence.
Questions of bona fide residence are determined on a case-by-case basis. It takes into account such factors as your intention or the purpose of your trip. For example, the nature and length of your stay abroad. The IRS decides whether you qualify as a bona fide resident largely on the basis of facts you report on Form 2555, Foreign Earned Income. Most importantly, the IRS cannot make this determination until you file Form 2555.
As a rule of thumb, the U.S. tax court will apply the 11-factor standard set forth in Sochurek v. Commissioner. The 11 factors are:
- intention of the taxpayer;
- establishment of home temporarily in the foreign country for an indefinite period;
- participation in the activities of the chosen community on social and cultural levels
- identification with the daily lives of the people. For instance, assimilation into the foreign environment;
- physical presence in the foreign country consistent with the employment;
- nature, extent and reasons for temporary absences from the temporary foreign home;
- assumption of economic burdens and payment of taxes to the foreign country;
- status of resident contrasted to that of transient or sojourner;
- treatment accorded income tax status by one’s employer;
- marital status and residence of family;
- nature and duration of employment. For instance, whether the assignment abroad could be promptly accomplished within a definite or specified time;
- good faith in making the trip abroad; whether for purpose of tax evasion.
Statement to Foreign Authorities
You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country; and the authorities hold that you are not subject to their income tax laws as a resident. If you have made such a statement and the authorities have not made a final decision on your status; you are not considered to be a bona fide resident of that foreign country.
Paying Income Tax To The Country Where You Claim Bona Fide Residence
Likewise, 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 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.
The bona fide residence test, like the physical presence test, comprises one way that an individual can qualify for the foreign earned income exclusion. However, you may still qualify under the physical presence test if you don’t qualify for the bona fide residence test.