Using FEIE: Physical Presence Test for U.S. Expats

May 20, 2024

The Foreign Earned Income Exclusion (FEIE) allows U.S. expats to exclude up to $120,000 of their foreign-earned income from U.S. taxation. This exclusion is a significant benefit, potentially saving expats thousands of dollars in taxes. To qualify for the FEIE, expats must pass either the Physical Presence Test or the Bona Fide Residence Test. This article will focus on the Physical Presence Test, providing updated information for 2024 and detailing everything you need to know to claim it.

What is the Physical Presence Test?

The Physical Presence Test is one of the two tests that U.S. expats can use to qualify for the FEIE. To meet this test, you must be physically present in a foreign country or countries for at least 330 full days during any 12-month period. This test does not require that you establish a residence in a foreign country, nor does it consider the purpose of your stay. Whether you are working, on holiday, or living abroad for other reasons, you can qualify as long as you meet the physical presence requirement. The test applies to determine eligibility for the FEIE and the foreign housing exclusion, and any time spent on US soil, including travel days, counts against the required days.

How Do You Qualify for the Physical Presence Test?

To qualify for the Physical Presence Test in 2024, you must:

  1. Be a U.S. person (filing Form 1040).
  2. Be physically present in a foreign country for at least 330 full days within any 12-month period.
  3. Avoid violating U.S. travel restrictions, such as unauthorized travel to embargoed countries like Cuba.
  4. Ensure that any income earned in countries where U.S. laws prohibit travel is not counted as foreign earned income.

Meeting these criteria allows you to exclude foreign income from U.S. tax liability.

What Counts as a Full Day for the Physical Presence Test?

A full day is defined as 24 consecutive hours, starting at midnight. Each of the 330 days must be spent entirely in a foreign country. When traveling to or from a foreign country, the time spent on or over international waters does not count towards the 330 days. For example, if you leave the U.S. on a flight that arrives in a foreign country at 2 PM, the first full day begins at midnight following your arrival.

How to Determine the 12-Month Period for the Physical Presence Test?

One of the advantages of the Physical Presence Test is the flexibility in choosing the 12-month period. Here are some key points to remember:

  • Your 12-month period can start on any day of the month and ends exactly 12 months later, the day before the same calendar date.
  • The period must be consecutive, but it can overlap with other periods if needed to maximize your qualifying days.
  • You can select the 12-month period that gives you the greatest exclusion, and you are not required to start the period with your first day abroad or end it with the day you leave the foreign country.

Common Pitfalls and Tips for the Physical Presence Test

Despite its apparent simplicity, here are some common pitfalls:

  • Family emergencies, illness, or employer directives: These do not provide exceptions to the 330-day rule. If you spend less than 330 days abroad, you will not qualify.
  • Travel outside foreign countries: Full days can be lost if you spend more than 24 hours traveling in international waters or in the U.S. For instance, leaving Portugal by ship at 9:00 AM on September 12th and arriving in Norway at 7:00 AM on September 14th would result in losing September 12th, 13th, and 14th as qualifying days.
  • IRS waivers: The IRS can waive the minimum time requirements if you must leave a foreign country due to war, civil unrest, or similar adverse conditions. However, you must prove that you reasonably could have expected to meet the minimum time requirements if not for these conditions.

Examples of the Physical Presence Test in Action

  1. Example 1: Andy, a U.S. citizen, moved to Berlin, Germany, on August 15, 2023, and stayed until July 26, 2024. Andy spent 345 days abroad and did not travel to the U.S. during this period, meeting the Physical Presence Test requirements.
  2. Example 2: Sarah, a U.S. expat, works in multiple countries. She spends several months in each country over a 20-month period. Sarah can choose any 12-month period within these 20 months where she spends 330 full days abroad to qualify. Meeting the Physical Presence Test criteria can significantly affect her taxable income by allowing her to claim expat exemptions and exclusions.

Physical Presence Test vs. Bona Fide Residence Test: Which is Easier?

The Physical Presence Test is often easier to qualify for compared to the Bona Fide Residence Test. The latter requires establishing a tax residence in a foreign country and demonstrating no intention of returning to the U.S., which the IRS assesses on a case-by-case basis. The Physical Presence Test, however, solely focuses on the number of days spent abroad, making it more straightforward for many expats.

Filing Requirements and Tax Forms for Foreign Earned Income Exclusion

To claim the FEIE using the Physical Presence Test, you must file Form 2555 along with Form 1040. On Form 2555, Part III is where you report information for the Physical Presence Test. Ensure all details are accurately reported to avoid issues with your exclusion claim.

Qualifying for the Foreign Earned Income Exclusion can significantly reduce your tax liability as a U.S. expat. The Physical Presence Test offers a clear and flexible path to claiming this benefit, making it easier for American expats to exclude foreign income. Expats can also benefit from the Foreign Tax Credit along with the Foreign Earned Income Exclusion.

If you have any questions or concerns about meeting the requirements or any other aspect of expat taxes, don’t hesitate to contact us. We offer free tax consultations via email to help you understand how to pass the Physical Presence Test and ensure you remain compliant with U.S. tax laws. Our team of expat tax experts is here to assist you with your tax needs, whether you are a green card holder, resident alien, or U.S. citizen living abroad.

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