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The Physical Presence Test...
The Physical Presence Test:
The Physical Presence Test is one of the two tests (the other being the Bona Fide Residence Test) used to qualify for the Foreign Earned Income Exclusion (FEIE).
If you recall from one of our earlier blog posts, the FEIE allows U.S. taxpayers working abroad to exclude a certain amount of their foreign-earned income from U.S. taxation, which can help reduce their overall tax liability. It's a great tool that few taxpayers realize.
What is the Physical Presence Test?
The Physical Presence Test requires that you be physically present in a foreign country for at least 330 full days during a 12-month period. The days do not have to be consecutive, but they must fall within a specific 12-month window. Additionally, these 330 days can be spread across multiple years as long as they are in a 12-month period.
What you need to know about the details:
Full day: A full day means 24 hours in the foreign country. A partial day (even if you are physically in the foreign country) does not count.
Foreign country: You must be in a foreign country for those 330 days, and travel to and from the U.S. or another country doesn’t count as time in a foreign country.
12-month period: The 12-month period can be any 12 consecutive months, but it is typically best to select a period that aligns with your tax year, though it doesn't have to be the calendar year.
How to Claim the Foreign Earned Income Exclusion Using the Physical Presence Test
To claim the FEIE under the Physical Presence Test, you need to file Form 2555 with your IRS tax return (Form 1040).
Here are the steps to complete Form 2555:
File Form 2555: On this form, you will provide details about your foreign employment and your eligibility under the Physical Presence Test.
Check the 330-day requirement: You need to prove that you were physically present in a foreign country for at least 330 full days within the 12-month period.
Report your income: Report your foreign-earned income on Form 2555, and it will be excluded from your taxable income up to the maximum allowable amount (for 2024, this is $112,000 per person, but it may adjust for inflation).
Attach the form: When filing your tax return, attach Form 2555 to your Form 1040, indicating that you are claiming the exclusion.
Foreign Earned Income Exclusion
Additional Tips:
Keep detailed records: Keep track of the days you spend in foreign countries to support your claim. This could include travel logs, flight itineraries, passport stamps, etc.
Exclusion limits: The amount of foreign-earned income that can be excluded changes annually, and there may also be exclusions for housing costs in certain cases, which you would report on the form.
One more thing: If you claim the foreign tax credit (FTC), you cannot use foreign source income that you excluded to compute the FTC.
If you qualify, the exclusion can significantly reduce your U.S. taxable income, making it one of the most advantageous benefits for expats.
Most items with international taxation and international reporting can become complex and confusing. Make sure you reach out to us at Liberty Tax Defenders to address any questions related to the FEIE.
We're here to help!
Cheers!
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