The FEIE Physical Presence Test for US Expats

The FEIE Physical Presence Test for US Expats:

Those Americans who are living abroad need to file a U.S federal tax return. Moreover, they need to declare their worldwide income, and they also are liable to pay U.S income tax against their ITIN (Individual Tax Identification Number).

Additionally, the most important provisions are that Expats can use to exclude their income earned abroad from U.S tax. This tax liability is the Foreign Earned Income Exclusion.

The FEIE or Foreign Earned Income Exclusion takes many U.S Expats out of U.S tax liability together. This is because they do not have a TIN (Tax Identification Number). However, it is only available to American Expats, and there are strict rules governing exactly who does and who does not qualify.

Tests to qualify for the FEIE:

In order to qualify for the Foreign Earned Income Exclusion, Expats must pass one of two Internal Revenue System tests. These tests include the Bona Fide Residence Test or the Physical Presence Test. Later on, we will discuss the Physical Presence Test.

Clearly, the Bona Fide Residence Test is better for Expats. These Expats are settled in another country to the extent that they can prove their permanent residence there. Moreover, owning or renting a permanent home and paying foreign taxes in their country of residence.

What is the Physical Presence Test?

The Physical Presence Test needs you to make sure you are living outside the States and in a Foreign country. Your presence in the foreign country should be at least 330 days in a twelve-month period.

Additionally, each day must be a full day (24-hour day). For instance, if you leave the States at 3 am in the morning and arrive in another country just an hour later, this day won’t count towards the 330 days.

This is despite you having spent an entire day abroad. The only exception to this rule is if you are only in the U.S in transit or on your way from one foreign country to another.

Here is another example, if you leave your country at 11 pm, and fly over the international waters for several hours until you land in a foreign country at 7 am on the following morning.

Despite Expat has not lived in the U.S at all on the day he arrives. It is because the first few hours were spent over international waters it does not count as a full day spent in another country. Furthermore, the U.S overseas territories or possessions count as foreign countries.

Moved abroad mid-year?

There is another interesting feature of the Physical Presence Test. It tells that the 330 days in the twelve-month period don’t necessarily need to coincide with the tax year. As a result, if you moved abroad on 31st March and spent the first three months of the year in the U.S. within this period you can start counting your days abroad from 1st April, claiming the FEIE from this date.

Moreover, the only exception to the 330-day rule is if you are forced to leave a foreign country. You may leave the foreign country due to war, civil unrest, or similar adverse conditions in that country.

Proving you met the Physical Presence Test

In case, you are trying to claim the FEIE (Foreign Earned Income Exclusion) using the Physical Presence Test, for that you need to make sure that you can prove your travel movements and try to keep your proof safe. It is for future audits. You may use traveling proof to claim the FEIE and show you met the Physical Presence Test on Form 2555.

Who should use the Physical Presence Test?

American Expats who spend most of their time abroad cant demonstrate permanent residence in one country. However, these Expats should use the Physical Presence Test, like international digital nomads for instance, who move from one country to another.

There are some cases in which the Foreign Earned Income Exclusion removes many U.S Expats from U.S tax liability. So, an Expat needs to make sure that he meets the requirements to qualify, planning your trips to the States accordingly.

Note: It does not carry over to future years automatically, So, you need to re-claim it every year.

For instance, if you earn over around $100,000 it can be claimed in conjunction with the FEIE and the Foreign Tax Credit. If it is applicable to your situation, you will reduce or eliminate any remaining U.S tax liability.

Read more about: How to apply for ITIN application in Washington?

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