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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.

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