36.5 Meeting the Foreign Residence or Physical Presence Test

To qualify for the foreign earned income exclusion, you must be either a U.S. citizen (or U.S. resident entitled to tax treaty benefits) meeting the foreign residence test or a U.S. citizen or resident meeting the physical presence test in a foreign country. The following areas are not considered foreign countries: Puerto Rico, Virgin Islands, Guam, Commonwealth of the Northern Mariana Islands, American Samoa, or the Antarctic region. The Tax Court has held that income earned in international airspace (by a flight attendant, for example) or in international waters (by a ship officer, for example) is not earned in a foreign country and thus does not qualify for the foreign earned income exclusion.

Planning Reminder

Claiming Exemption From Withholding for Excludable Income

You can file Form 673 with your U.S. employer to claim an exemption from withholding on wages to the extent of your expected foreign earned income exclusion and foreign housing exclusion. You must certify, under penalty of perjury, that you have good reason to believe that you will qualify under the foreign residence or physical presence test and also must certify your estimated foreign housing costs.

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Waiver of time test.

If war or civil unrest prevented you from meeting the foreign residence or physical presence test, you may claim the exclusion for the period you actually were a resident or physically present abroad. Foreign locations and the time periods that qualify for the waiver of the residency and physical presence tests are listed in the instructions to Form 2555.

If, by the due date of your 2012 return (April 15, 2013), you have not yet satisfied the foreign residence or physical presence test, but you expect to meet either test after the filing date, you may either file on the due date and report your earnings or ask for a filing extension under the rules at 36.7.

Foreign residence test.

You must be a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes one full tax year; a full tax year is from January 1 through December 31 for individuals who file on a calendar-year basis. A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty and meets the full-year foreign residence test also qualifies. Business or vacation trips to the U.S. or another country will not disqualify you from satisfying the foreign residence test. If you are abroad more than one year but less than two, the entire period qualifies if it includes one full tax year.

To prove you are a foreign resident, you must show your intention to be a resident of the foreign country. Evidence tending to confirm your intention to stay in a foreign country includes: (1) your family accompanies you; (2) you buy a house or rent an apartment rather than a hotel room; (3) you participate in the foreign community activities; (4) you can speak the foreign language; (5) you have a permanent foreign address; (6) you join clubs there; or (7) you open charge accounts in stores in the foreign country.

You will not qualify if you take inconsistent positions toward your foreign residency. That is, you will not be treated as a bona fide resident of a foreign country if you have earned income from sources within that country, filed a statement with the authorities of that country that you are not a resident there, and have been held not subject to the income tax of that country. However, this rule does not prevent you from qualifying under the physical presence test.

Caution

Residence or Domicile?

Residence does not have the same meaning as domicile. Your domicile is a permanent place of abode; it is the place to which you eventually plan to return wherever you go. You may have a residence in a place other than your domicile. Thus, you may go, say, to Amsterdam, and take up residence there and still intend to return to your domicile in the U.S. But leaving your domicile does not, by itself, establish a bona fide residence in a new place. You must intend to make a new place your residence.

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If you cannot prove that you are a resident, check to determine if your stay qualifies under the physical presence test.

Physical presence test.

To qualify under this test, you must show you were on foreign soil 330 days (about 11 months) during a 12-month period. Whether you were a resident or a transient is of no importance. You have to show you were physically present in a foreign country or countries for 330 full days during any 12-consecutive-month period. The 330 qualifying days do not have to be consecutive. The 12-month period may begin with any day. There is no requirement that it begin with your first full day abroad. It may begin before or after arrival in a foreign country and may end before or after departure from a foreign country. A full day is from midnight to midnight (24 consecutive hours). You must spend each of the 330 days on foreign soil. In departing from U.S. soil to go directly to the foreign country, or in returning directly to the U.S. from a foreign country, the time you spend on or over international waters does not count toward the 330-day total.

Choosing the 12-month period.

You qualify under the physical presence test if you were on foreign soil 330 days during any period of 12 consecutive months. Since there may be several 12-month periods during which you meet the 330-day test, you should choose the 12-month period allowing you the largest possible exclusion if you qualify under the physical presence test for only part of 2012.