IRS's Bona Fide Residence Test

By Robert Bennett , last updated August 12, 2011

The IRS Bona Fide Residence test is used to determine if some or all of your foreign earned income can be excluded or deducted from your gross income. There are thousands of Americans who live and work abroad. These people are called expatriates. Regardless of where you live and work, the U.S. government requires all expatriates to complete a Federal Income Tax Return.

IRS Form 2555

The IRS Form 2555 is used to determine your filing status in regards to your earned income. To qualify you must be a U.S. Citizen or U.S. resident alien, have established a residence in a foreign country and reside there for the entire calendar year, and have the intention of staying in that country indefinitely. Basically, the expatriate will live and work in a foreign country with no immediate intention of returning to the United States. The emphasis for the requirements is ‘intention.’ Do you intend to return to the United States to live?

Failing the Bona Fide Residence Test

If Joe moves to Germany for a two year assignment and does not return to the United States for 24 months, then Joe does not pass the Bona Fide Residence test, because at the end of 24 months he intends to move back to the United States. Another example would be if Joe purchases a home in Germany and lives and works there for ten months every year. In this case, Joe does not pass the Bona Fide Residence test.

Passing the Bona Fide Residence Test

If Joe accepts a position in Germany for an unspecified amount of time, after one calendar year, he would be eligible for the credits and exclusions available for expatriates. This is because he has no immediate plans to move back to the United States. Another scenario would be if Joe moves his entire family to Germany. He purchases a home and works there. His work returns him to the United States three weeks every year for training and meetings. Joe and his family pass the Bona Fide Residence test, and they are eligible for the credit and exclusions available to expatriates.

Passing the Bona Fide Residence test can save expatriates thousands of dollars in taxes. The IRS handles each case individually. If you feel you qualify as an expatriate, you should complete IRS Form 2555.

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