The Physical Presence Test is used by the IRS to help decide if a taxpayer qualifies for the Foreign Housing Deduction, the Foreign Housing Exclusion or the FEIE (Foreign Earned Income Exclusion) when filing their U.S. tax returns. The Physical Presence Test is one of two tests (the other being the Bonafide Resident Test) that U.S. Americans and green cardholders can use to determine if they can claim these tax deductions and credits.
If you are an Expat whose home is in a foreign country, you will want to see if you qualify for these exclusions and deductions, so that you can avoid being double-taxed for your foreign earned income.
To meet the standards set by the IRS for the Physical Presence Test, you have to:
1. Be a U.S. citizen or a resident alien
2. And be physically present in a foreign country or countries for a minimum of 330 days over a 12 month period. The 330 days do not need to be in a row. You do not have to be in a foreign country because of work. You can be in a foreign country for your own personal reasons or vacation.
A full day is considered a complete 24 hour period that starts at midnight. However, this can get tricky with traveling.
Here are some important points to consider when traveling:
• Any full day (24 hour period) spent outside a foreign country or countries will not count towards the 330 days. An example of being outside the foreign country would be if one were to travel between foreign countries on a boat or ship.
• If you exit the United States or come back to the U.S., the time that you spend over international waters or on international waters will not count towards the 330 days needed to pass the Physical Presence Test.
As you can see, if you are traveling abroad, you really want to understand if your days count towards the 330-day minimum, and that’s where an International Tax Expert can help steer you through the guidelines set up by the IRS.
There are 4 rules created by the IRS to help determine what a 12 month period is in regards to the Physical Presence Test. They are:
• You do not have to begin a 12-month period with your first full day in a foreign country or to end it with the day you leave. You can choose the 12-month period that gives you the greatest exclusion.
• A 12-month period must be made up of consecutive months. Any 12-month period can be used if the 330 days in a foreign country fall within that period.
• In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another.
• A 12-month period can begin with any day of the month. It ends the day before the same calendar day, 12 months later.
If you have any questions regarding your Expat status or if you pass the Physical Presence Test, please call us at 407-382-6658 to get your international tax questions answered by a professional.