Bona Fide Resident Test
The Bona Fide Residence Test is strictly a qualitative test, found on Form 2555 page 1 Part II.
Typically due to the ease of use and completion the Bona Fide Residence Test is used in other than transition years; that is generally not in tax years of expatriation from the U.S. to abroad and repatriation back to the U.S. Instead the Bona Fide Residence Test in used in the intermediary tax years.
Qualifications to meet the Bona Fide Residence Test
In order to meet the requirements for the Bona Fide Residence Test under you must be:
- A U.S. citizen; or
- Be a U.S. resident alien (in this sense green card holders) which are nationals of countries with whom have an income tax treaty with the U.S. containing a non-discrimination clause, without regard to any treaty savings clauses (Rev. Ruling 91-58); and
- Meet the requirement to be in a ‘foreign country’ for one full calendar year (i.e. January 1 to December 31) all-inclusive.
Once the Bona Fide Residence Test is met you may leave the foreign country for brief or temporary trips to the U.S. However to maintain the Bona Fide Residence Test status, you must have the clear intention of returning to your foreign country of Bona Fide Residence from such trips, without unreasonable delay. Therefore we always recommend the taxpayer consider purchasing a return ticket prior to departing for the U.S.
The Bona Fide Residence Test does not necessarily mean your domicile, where domicile is your permanent home, the place that you always intend to return.
Although qualitative in nature, you are not automatically granted Bona Fide Residence Test status by living or working in a foreign country(s) for a particular job or for a specified period of time of one calendar year or longer. Length of stay, nature of the job, intention and purpose are all factors that are considered in meeting the Bona Fide Residence Test. The Bona Fide Residence Test is determined by the IRS on a case by case basis.
Upon completion and filing of Form 2555, the IRS may perform an analysis of the taxpayer’s specific facts and circumstances, since the IRC Section 911(d)(1)(A) requires that a taxpayer establish Bona Fide Residence to the “satisfaction of the secretary”. Courts have construed this statutory language as imposing a “strong proof” standard on taxpayers to demonstrate residence in a foreign country as opposed to the lesser preponderance of evidence standard for proving ‘tax home’ status.
Foreign Country Defined
A ‘foreign country’ for the purposes the Foreign Earned Income Exclusion, IRC Sec 911 is defined as any territory under the sovereignty of a government other than the United States.
‘Foreign country’ does not include ships or aircraft traveling in or above international waters. Nor does ‘foreign country’ include offshore installations which are located outside the territorial waters of any individual nation.
Additionally, the term ‘foreign country’ does include the country’s airspace and territorial waters, in addition to the seabed and subsoil of those submarine areas adjacent to the county’s territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources.
The term ‘foreign country’ does not include Antarctica or U.S. possessions, such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands and the Johnston Island.