The Physical Presence Test is one of two tests used by the IRS to determine an individual’s eligibility for the foreign earned income exclusion (FEIE). Meeting the physical presence test allows an individual to exclude up to a certain amount of foreign earned income from their taxable income. The amount of the exclusion varies each year and is subject to certain limitations and qualifications, so it’s important to consult with a tax professional for specific advice. The Physical Presence Test can be used by U.S. citizens and resident aliens who work and live abroad, as well as U.S. citizens and resident aliens who are members of the armed forces deployed outside the United States. It is important to note that meeting the requirements of the Physical Presence Test is just one of the ways that taxpayers can qualify for the Foreign Earned Income Exclusion, another way is by meeting the Bona Fide Resident Test.
To qualify for the Physical Presence Test, the individual must have a tax home in a foreign country and must be physically present in one or more foreign countries for at least 330 full days during a 12-month period. The 12-month period can begin on any day during the calendar year and can be different from the calendar year. Under this test, an individual must have been physically present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months. To meet the physical presence test, an individual must count each day he or she is present in a foreign country, as well as any full days of travel to or from the foreign country. Partial days of travel are not counted. The 12-month period can begin on any day during the calendar year, but once chosen, it must be used consistently for future years.
When using the physical presence test to qualify for the foreign earned income exclusion, the IRS defines the “home country” as the country where an individual has a regular or principal place of business, employment, or post of duty, regardless of where the individual maintains their family home. On the other hand, the “host country” is the foreign country where the individual is physically present and working, and which is expected to be their temporary place of employment. It’s important to note that an individual can only claim the foreign earned income exclusion for income earned in a host country that is different from their home country. Additionally, an individual may have multiple host countries during the 12-month period used for the physical presence test, as long as the individual is physically present in a foreign country or countries for at least 330 full days during that period.
An individual can count days spent in transit while traveling between two foreign countries as days physically present in a foreign country for purposes of meeting the Physical Presence Test. However, only full days spent in transit count toward the test. If an individual has a layover or spends only part of a day in transit, that day cannot be counted as a day physically present in a foreign country. In addition, days spent in the individual’s home country or countries, or days spent outside any country (such as in international waters), cannot be counted toward the Physical Presence Test. For instance, let’s say an individual departs from the United States for Germany on May 10th and arrives in Germany at 9:00 a.m. on May 11th. In this case, the individual’s first full day in Germany would be May 12th for the Physical Presence Test.
It’s important to note that the Physical Presence Test is just one of the two tests used by the IRS to determine an individual’s eligibility for the foreign earned income exclusion. The other test is the bona fide residence test, which requires an individual to establish a bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year.
In summary, to qualify for the FEIE, taxpayers need to ensure they spend at least 330 days outside the United States during a 12-month period to meet the physical presence test according to the tax code guidelines. Proper documentation of time spent abroad is important in case of any queries from the tax authorities. Careful planning and record keeping can help reap the benefits of tax savings through the FEIE. If you are considering taking advantage of the FEIE, it is important to consult with a tax professional to determine which test is most appropriate for your situation and to ensure that you are meeting all the necessary requirements.
