PHYSICAL PRESENCE TEST
The Physical Presence Test is one of the two tests US Americans and green card holders living abroad can use to qualify to claim the Foreign Earned Income Exclusion, the Foreign Housing Exclusion, or the Foreign Housing Deduction. If your tax home is in a foreign country, the Physical Presence Test or the Bona Fide Resident Test can be used by an expat to maximize the exclusion of their foreign earned income and avoid double taxation.
What are the requirements to meet the physical presence test?
To meet the physical presence test, you must
1. You must be physically present in a foreign country or countries for at least 330 full calendar days during a period of 12 consecutive months
2. Be a US citizen and resident alien
How to count the days:
What is considered a full day?
A full day is considered to be a full 24 hour period beginning at midnight.
What are the rules to determine the 12-month period?
The IRS provides four rules to determine a 12-month period
You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time.
Exception. You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. See Waiver of Time Requirements, later.
Travel. When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total.
Passing over foreign country. If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States.
Change of location. You can move about from one place to another in a foreign country or to another foreign country without losing full days. If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel.
In United States while in transit. If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. You are treated as traveling over areas not within any foreign country.
How to figure the 12-month period. There are four rules you should know when figuring the 12-month period.
· Your 12-month period can begin with any day of the month. It ends the day before the same calendar day, 12 months later.
· Your 12-month period must be made up of consecutive months. Any 12-month period can be used if the 330 days in a foreign country fall within that period.
· You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. You can choose the 12-month period that gives you the greatest exclusion.
· In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another.
Waiver of Time Requirements
Both the bona fide residence test and the physical presence test contain minimum time requirements. The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver.
U.S. Travel Restrictions
If you are present in a foreign country in violation of U.S. law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount.
What if I don’t meet the 12-month period for a tax year?
In the year of a move to a foreign country, it is not always possible to meet the 12-month period in a calendar year. In this case, the IRS offers US citizen and resident alien taxpayers who expect to file the Form 2555 or Form 2555-EZ and need additional time to meet either the bona fide residence test or the physical presence test to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. This extension can go beyond the normal filing extension due date of October 15th to meet either of the two tests!! To request an extension under these conditions, you must complete the Form 2350, Application for Extension of Time to File U.S. Income Tax Return. To file the Form 2350, you must:
· Be a US citizen or resident alien
· You expect to qualify after the due date of your return (normally April 15) for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction
· Your tax home must be in foreign country or countries throughout the time period for your bona fide or physical presence
· Pay any taxes due by April 15
· File the form on or before due date of your return - April 15th or if you are “out of country” on April 15th, on or before June 15th , but do it early enough to finish your return on time because the extension could potentially not be approved
· If the extension is approved, the extension will be valid until 30 days the date you expect to meet either the bona fide residence test or the physical presence test or if you allocate moving expenses you could be given an extension to 90 days after the end of the year following the year you move