The Bona Fide Resident Test (BFR) is one of two tests used by the IRS to determine an individual’s eligibility for the foreign earned income exclusion (FEIE). This exclusion allows US taxpayers who work and live abroad to exclude a certain amount of their foreign earned income from US taxation. The Bona Fide Resident Test can be used by US citizens or resident aliens who have a tax home in a foreign country and meet the requirements to qualify as a bona fide resident of that foreign country for an entire tax year. It is important to note that meeting the requirements of the Bona Fide Resident Test is just one of the ways that taxpayers can qualify for the Foreign Earned Income Exclusion. Another way is by meeting the Physical Presence Test, which requires the individual to be physically present in a foreign country for at least 330 full days during a 12-month period.
To qualify for the FEIE under the Bona Fide Resident Test, an individual must be considered a bona fide resident of a foreign country for an entire tax year. This means that the individual must have a closer connection to the foreign country than to the United States and must have established a permanent residence in the foreign country. To use this test, the individual must have lived in the foreign country for an uninterrupted period that includes an entire tax year. Additionally, the individual must not have any intention to return to the United States or to establish a new tax home in the United States during the tax year in question.
The IRS considers a number of factors when determining whether an individual is a bona fide resident of a foreign country. These factors include the individual’s intention to remain in the foreign country indefinitely, the length and nature of the individual’s stay in the foreign country, their activities while residing in the foreign country, and whether they paid taxes to the foreign country, among other considerations. The determination of whether an individual meets the Bona Fide Resident Test is based on the facts and circumstances of each case, and there is no set rule or formula that determines whether an individual meets the test.
To illustrate the BFR, let’s consider an example. Maria is a U.S. citizen who works as an engineer for a U.S. company. She is offered a job in Germany and decides to move there. She leases an apartment, enrolls her children in German schools, and applies for a German residency permit. She also intends to stay in Germany for the foreseeable future and does not plan to return to the United States. Maria moves to Germany on January 1, 2022, and begins working for the German subsidiary of her U.S. company. She stays in Germany for the entire calendar year of 2022 and establishes a bona fide residence in Germany. She meets all the requirements for the BFR and can exclude up to $112,000 of her foreign earned income from her taxable income for the 2022 tax year.
In conclusion, the Bona Fide Resident Test can be a valuable tool for taxpayers who qualify for the FEIE. However, it’s important to understand the requirements for establishing bona fide residency in a foreign country and to carefully consider the individual facts and circumstances of each case. However, there are many factors to consider, and it is advisable to seek the advice of a tax professional to ensure that you are taking advantage of all the tax benefits available to you.
