The Bona Fide Residence Test and the Common Errors Expats Make
Many expats can use the FEIE or the Foreign Earned Income Exclusion as one of the tax money-saving devices. If you want to take advantage of the FEIE, you have to use either the physical presence test or the bona fide residence test. Although many expats consider the bona fide residence test as a natural alternative, it is one of those tax requirements that are more complicated for the expats. When using the bona fide residence test, take note of the following errors.
Error One: Thinking that living for one uninterrupted year abroad qualifies you for the test
Expats who want to avail of the bona fide residence test will qualify on a case-by-case basis. There is no automatic eligibility. Other factors come into play before you become qualified. There are some instances when an expat has to return to the U.S. for some short trips or vacation purposes. Still, these expats qualify to use the bona fide residence test. The primary condition is a clear intention to return to a foreign country where you already reside.
Error two: Assuming that the only people who can qualify for the bona fide residence test U.S. citizens
Aside from U.S. citizens, U.S. resident aliens living in foreign countries are also qualified. Only, their countries should have an income tax treaty with the United States.
Error three: Supposing the only requirement to be eligible for the bona fide residence test is to be present for a tax year
The bona fide residence test is more subjective than the physical presence test. It is not as straightforward as it may look. First, it does not only consider how long you have stayed in your foreign country. Then, it has to verify your intention of moving offshore. The nature of your job abroad is also evaluated. An example would be working in a foreign country for one year. The date when you ended your occupation could equal to a disqualification for the bona fide residence test. There is still a chance you may qualify since this test is subjective, and there are many other factors to consider. If you are a U.S. government employee working abroad, you are not qualified. You must also complete Form 2555. This is the form that will enable you to be eligible for the FEIE.
Error four: Thinking that your domicile and your bona fide residence test are the same
It can be that your residence is your domicile. It can also be different. Your domicile is your permanent home. It is the place that you always want to return. The bona fide residence test uses the intention or objective of your trip. It also takes considers the nature and length of your stay abroad. A good example is having a home in the U.S. This would not mean that you are not allowed to qualify for the bona fide residence test. But the IRS would consider your situation when deciding if you are eligible for the bona fide residence test or not.
Error five: Using both bona fide residence and physical presence tests.
You should only choose the test that will be more convenient for you to avail. Using both tests could lead to being rejected for the tests. Even when your tax could go through the IRS scrutiny well, the process can be complete without using the FEIE. The IRS would take months when correcting this error. The process is also too complicated that you would want to avoid the stress it brings.
On the positive note, you can use the bona fide residence test to be eligible for the Foreign Housing Deduction. That is if you have qualified housing expenditures. Filling out Form 2555 can lead to accomplishing the requirements for some money-saving deductions. Not just one, but for two! Be careful to avoid the errors mentioned above. You can save on money, time, and effort if you do everything correctly.