You have heard that you must live outside the United States and can only return for a few days a year to qualify for the Foreign Earned Income Exclusion. While that may be true in a particular case, in general it will not apply to someone living outside the United States each year of their foreign residency. Let me explain.
First, you might want to read about the basics at my previous posts:
The first article listed above explains the Foreign Earned Income Exclusion and how you qualify. But there are two ways to qualify and one of them requires that you live in a foreign country and are physically present in a foreign country for at least 330 full days during a period of 12 consecutive months. The other way is to be a bona fide resident of another country.
The Physical Presence Test vs Bona Fide Residence
So the question is, do you have to be outside the U.S. for 330 full days each year or how does that work? Let's take an example for a 2018 tax return. Let's say in 2018 you move to another country after January 1, 2018 and you make some trips back to the United States.
If you are out of the country 330 full days between February 1, 2018 to January 31, 2019 you would qualify under the physical presence test to exclude foreign earned income that you earned between February 1 and December 31, 2018, subject to the pro-rated limit for the year.
Then would you still need to be counting days in 2019? Yes, but only up until January 31, 2019 so that we could take a pro-rated portion of the foreign earned income exclusion when I prepare your 2018 tax return in the upcoming spring tax season. So in this case, we would have to wait until after you met the requirement on January 31, 2019 to file your 2018 tax return. Then in 2019, after January 31, 2019, you would not have to worry about the requirement of being outside the U.S. for 330 full days in a period of twelve consecutive months. In this case, in the calendar year 2019 you will satisfy the bona fide resident test because as of December 31, 2019 you will have lived outside the U.S. for a full calendar year. So after February 1, 2019 you can spend more days in the US, but here is the IRS wording on that qualification:
During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.
To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.
So you can't make an extended stay in US and still claim the exclusion just because you rent a place in another country. You have to fulfill the spirit of having a foreign residency.
Then too any of your income that you earn while you are in the US you don't get to exclude.
Filing a Tax Return for First Year Tax When You Move to Another Country
Now here are details about taking and meeting the bona fide residence test. This is complicated but necessary details and I will explain the relevancy in the next paragraph. The requirement to be outside the US for 330 full days in a twelve month period is to be able to take the exclusion on, in this case, your 2018 tax return for part of the year you lived outside the U.S. when we file your return in the spring of 2019. Without it you would have to file without the exclusion until you become a bona fide resident of another country which requires you live outside the U.S. for a "full calendar year". Once you meet the bona fide residence test, which in this case will be the calendar year 2019, the requirement to be outside the U.S. for 330 full days in a period of 12 consecutive months would not not apply. In our example you would not have to be concerned about being out of the U.S. for 330 days of a twelve month period after you met the test on January 31, 2019. So on your return for 2019 we will show, as long as you reside outside the U.S. and meet the requirements for the bona fide residence test, that you were a bona fide resident of another country for the full year 2019.
The point is in regard to what we do with your 2018 tax return. By using the physical presence test we can take the exclusion on your 2018 return for the part of the year that you use to meet the test of being outside the U.S. for 330 full days in a twelve month period, in our example, from February 1 to December 31, 2018. Without it you would not be able to take the exclusion on your 2018 return when it is filed in the spring for 2019. Then you would have to wait until you meet the bona fide resident test which would not be until after December 31, 2019. Then in 2020 we could go back and amend your 2018 return to take the exclusion for the part of the year that you lived outside the U.S.. So in that case you pay more taxes for 2018 when you file in the spring for 2019 but you could get some of that back for the exclusion using the bona fide residence test but you would have to wait until after you meet the test which has to cover a full calendar year, so after December 31, 2019.
Taking the Foreign Earned Income Exclusion Your First Year Abroad
So the take away is you probably want to take the exclusion for part of 2018 when you file in the spring of 2019. However, if you don't meet the 330 full days in a twelve month period requirement you can still take the exclusion for 2018 but you would have to wait until 2020 to claim it by filing an amended return. Which would be fine with me, because I would charge you for amending the return, but you probably don't want the IRS keeping a portion for your money for a year. In this case you would want to see if you can meet the 330 full days in a twelve consecutive month period requirement for February 1, 2018 to January 31, 2019 so as to take the exclusion on your 2018 return. But know that if you don't meet the 330 full days in a twelve month period requirement that you can still qualify for the exclusion for part of 2018 but you will have to wait until 2020, when you will have lived outside the US for a full calendar year, to file an amended return and to get some of your taxes for 2018 back.
It is also important to understand what foreign earned income is and that the exclusion applies to income taxes and not self employment taxes. In addition, if you open foreign bank accounts you may have a reporting requirement to fulfill. If you are entertaining the possibility of moving to a foreign country I recommend you contact me first to make sure you understand the tax a reporting consequences of your move.
This is a unique and complicated aspect of U.S. income taxes. There are not too many tax preparers that understand how it works. However, I have done several of this type of returns and I can help you with yours.
The CPA Superhero
The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.