How do I qualify for the foreign-earned income exclusion?
Figuring out how to qualify for the foreign-earned income exclusion doesn’t have to be a headache.
Let’s break down the two main ways to get there, as explained by Aya: the Physical Presence Test (PPT) and the Bona Fide Residence Test (BFR). Both have their perks, depending on your situation.
The Physical Presence Test (PPT)
- 330 Days Abroad Rule: Simply put, spend at least 330 full days outside the US in any 12-month period, and you’re on track.
- Pick Your 12 Months: The cool part? This 12-month period can start whenever you want in the year, giving you some wiggle room in planning.
The Bona Fide Residence Test (BFR)
- A Year Overseas: If you’ve already been living outside the US for a full year, the BFR might be your ticket.
- More Time Back Home: Unlike the PPT, the BFR is a bit more relaxed about trips back to the US, allowing over 35 days.
Which test should I focus on completing first?
However, if you’ve just moved abroad, say to Saudi Arabia, starting with the PPT is usually the way to go. It’s a straightforward method to establish your eligibility.
How exactly do I get qualified with the BFR?
To meet the BFR criteria, you need to have spent a whole calendar year abroad, with limited time in the US. If you’re frequently traveling back to the US, the BFR might be great for you.
What should I do to prepare?
- Understand Your Status: Knowing which test suits you best can save you a lot in taxes.
- Planning Ahead: Keep track of your travel dates. Documenting your time abroad can make the qualification process smoother.
- Consult Experts: Don’t hesitate to seek advice from tax professionals, especially if your situation has unique aspects.
In a nutshell, US expats have two clear paths to qualify for the foreign-earned income exclusion: the PPT and the BFR. Each has its own set of rules, but understanding them can lead to significant tax savings. Whether you’re a new expat or have been living abroad for a while, getting to grips with these tests can make a big difference in your financial well-being.
