Navigating FEIE Eligibility with Clarity

May 12, 2024

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Among the myriad of misunderstandings identified this tax season, partial year qualifications for the Foreign Earned Income Exclusion (FEIE) and qualifying for the FEIE using the bona fide resident test (BFR) emerged as particularly noteworthy, so we thought we’d take you on a deeper dive as to how these concepts work.

To qualify for the FEIE, there are two tests you can use—the physical presence test and the bona fide residence test. Your travel and living situation will determine which test you use.

Physical Presence Test

The time-based PPT revolves around counting the days spent abroad. You only need to spend a total of 330 full days out of any 12-month period on foreign soil. Keep in mind that time spent on international waters does not count towards the physical presence test.  For the 2023 tax year, you can exclude up to $120,000 of your foreign-earned income from U.S. federal taxes. In 2024, that amount increases to $126,500.

Partial Years
Now, let’s discuss those mid-year moves. Even if you’re jetting off or heading back stateside halfway through the year, you could still qualify for a partial exclusion. It’s all prorated based on the number of days you qualify for in the tax year. You determine your maximum allowable exclusion by dividing the number of days spent abroad by 365, and then multiplying this resulting fraction by the annual exclusion limit.

Imagine you spent all of 2022 traveling the world. But in 2023, you came back to the US in July for a short trip and thought, “Wow, summer in my hometown is really gorgeous!” You ended up sticking around longer, maybe even finding someone special. Before you knew it, Christmas arrived, and you were enjoying eggnog with the fam by the fire in Wisconsin. Now you’re worried you might have blown your chances with the FEIE. 

Not the case! Based on the time you spent traveling in 2022, you remain eligible for the FEIE by selecting an FEIE period from July 2022 to July 2023. Using the formula below, you can still exclude up to $60,000 of income. This allowance amount is due to approximately half of your 330 FEIE qualifying days, in the July 2022-July 2023 exclusion period, falls within the 2023 tax year. 

Let’s break it down with simple math: You were outside the US from January 2023 to June 2023, which counts as 181 FEIE qualifying days for 2023. Instead of sticking with the calendar year of 2023 for FEIE, you went back to 2022 and claimed July 2022-July 2023 as your FEIE period. So, 181 FEIE qualifying days divided by 365 equals roughly .50; then, .50 times $120,000 equals $60,000. 

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So don’t give up on the FEIE just because you spent too much time in the US in a calendar year.  You may still qualify for a partial year based on the way the PPT works. 

Bona Fide Resident Test

The flip side of the PPT, the intention-based BFR test entails putting down roots in the foreign soil. Therefore, qualifying as a bona fide resident of a foreign country goes beyond mere physical presence. It involves creating a sense of home, finding purpose through work and community ties, and demonstrating genuine commitment throughout an entire tax year. As a bona fide resident, you’re afforded some flexibility—you can jet off on trips back to the U.S. without counting your days, or anywhere else you please,  as long as you’re clear about returning to your foreign abode.

The BFR does require that you are a “resident” for an uninterrupted calendar year in your new resident country in order to qualify, but once you have that calendar year, you can go back and retroactively apply it to past years. Which means that if you move to Mexico in August 2023, you wouldn’t qualify for for BFR until the tax filing year of 2024, but once you qualify in 2024, you can go back and amend your return to apply BFR to 2023 and get a refund of any taxes paid on foreign earned income. 

Notice that we didn’t mention a resident visa above.  While having a resident visa can strengthen your BFR case, it’s not a necessity. There are currently a few digital nomad hotspots that allow for easy tourist visa reset every 3 or 6 months—think South Africa, Mexico, Costa Rica, and others—and plenty of nomads are setting down roots in these places while not getting more permanent visas. That doesn’t disqualify you from claiming BFR, if the facts and circumstances of your case mentioned above match the BFR criteria.

You might also notice we didn’t mention taxes. It’s commonly misunderstood that you have to be paying taxes to another country to qualify for BFR, but that is also not the case. The statue reads that if you are required to pay taxes in your new home, you should be paying those taxes, lest you lose your FEIE—but if you’re not required to pay taxes, either by virtue of your visa status or time spent in that country, you can still qualify for FEIE under BFR.

If you’re still a little unclear about qualifying for the FEIE, we’d love to chat you through it.  Feel free to book a call with our team so we can sort out your particular situation.