Physical Presence Test to Qualify for Foreign Earned Income Exclusion

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. To Qualify for the Foreign Earned Income Exclusion you must meet either the Bona Fide Residence Test or the Physical Presence Test.

PHYSICAL PRESENCE TEST

To meet the Physical Presence Test you must be physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. Any U.S. citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction.

The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.

330 full days. Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation.

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.

Full day. A full day is a period of 24 consecutive hours, beginning at midnight.

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.

Example. You leave the United States for France by air on June 10. You arrive in France at 9:00 a.m. on June 11. Your first full day of physical presence in France is June 12.

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.

Example. You leave the United States by air at 9:30 a.m. on June 10 to travel to Kenya. You pass over western Africa at 11:00 p.m. on June 10 and arrive in Kenya at 12:30 a.m. on June 11. Your first full day in a foreign country is June 11.

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.

Example 1. You leave Ireland by air at 11:00 p.m. on July 6 and arrive in Sweden at 5:00 a.m. on July 7. Your trip takes less than 24 hours and you lose no full days.

Example 2. You leave Norway by ship at 10:00 p.m. on July 6 and arrive in Portugal at 6:00 a.m. on July 8. Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. If you remain in Portugal, your next full day in a foreign country is July 9.

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.

Travel Log.  You must track all of your travel to and from the US and all foreign countries.  This will be needed to file your tax return.

Required Travel Log
Required Travel Log

Source:  IRS Publication 54

Can I Claim the Foreign Earned Income Exclusion?

What is the Foreign Earned INcome Exclusion?

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income some or all of your foreign earnings.  The amount allowed to be excluded is adjusted annually for inflation.

How do I qualify for the Exclusion?

Requirements to claim the foreign earned income exclusion are; 1) Your tax home must be in a foreign country.  2) You must have foreign earned income.  3)  a)You must be a US citizen who is a Bona Fide Residence for an uninterrupted period that includes an entire tax year, b) or a US resident alien who is a citizen or national of a country which the United States has an income tax treaty and who is a Bona Fide Resident uninterrupted for an entire year, c) or US citizen or US resident alient who is physically present for at least 330 full days during any period of 12 consecutive months and pass the Physical Presence Test.

Your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you do not have a regular or principal place of business because of the nature of your trade or business, your tax home is your regular place of abode (the place where you regularly live). You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. However, if you are temporarily present in the United States, or you maintain a dwelling in the United States (whether or not that dwelling is used by your spouse and dependents), it does not necessarily mean that your abode is in the United States during that time. There are special rules, so be sure to speak to your tax professional or CPA.

HOW MUCH IS THE EXCLUSION?

The amount is adjusted annually for inflation. The most recent tax years are listed below:

For the Tax Year Max Exclusion
2016 $101,300
2015 $100,800
2014 $99,200
2013 $97,600
2012 $95,100
2011 $92,900
2010 $91,500

Does it Exclude Self Employment

No, you must still figure and pay self employment taxes on earned income from 1099’s, K-1’s, partnership’s, self employment, etc. .

Do the Exclusions apply for state taxes

Obviously for states where there is no state income tax no state tax is due. Each state has there own set of rules and some have harder standards to meet the exclusion. Be sure to speak to your tax professional or CPA.

Source:  IRS Publication 54