I have been working abroad for many years and claiming the Foreign Earned Income Exclusion using a Form 2555. I claim the Physical Presence test every year. Can you explain the difference between the so-called Physical Presence test and the Bona Fide Residence test?

To be eligible for the foreign earned income exclusion, you must have a tax home in a foreign country and be a U.S. citizen or resident alien. You must also be either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (Bona Fide Residence Test), or you must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months (Physical Presence Test).

U.S. citizens may qualify under either test. But, there are specific definitions for U.S. resident aliens under each test.

Physical Presence Test

To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country or countries, for at least 330 full days during any period of 12 consecutive months. A full day means the 24-hour period that starts at midnight.

Bona Fide Residence Test

To meet this test, you must be one of the following:

  • A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return), or
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return).

Whether you are a bona fide resident of a foreign country depends on your intention about the length and nature of your stay.  Evidence of your intention may be your words and acts.  If these conflict, your acts carry more weight than your words.  Generally, if you go to a foreign country for a definite temporary purpose and return to the United States after you accomplish it, you are not a bona fide resident of the foreign country.

The two tests differ in that one is based exclusively on physical presence while the other is based on a taxpayer’s intentions.