An American expatriate cannot qualify for the earned income exclusion or the housing allowance without first passing the Physical Presence Test. These deductions cannot be earned by frequent travelers or Americans who own vacation property overseas. To pass the Physical Presence Test, an expat must spend 330 full days out of a consecutive 365 (a 12 month period) in a foreign county. The following are the most commonly asked questions relating to the PPT.
Does the 12 month period that determines my physical presence need to coincide with the tax year?
No. Any twelve month time period can be used, as long as the 330 days are contained within it. Expats usually start the twelve month period with their first full day in their foreign home.
Does my 12 month time period need to be the same every year?
No. Each year is different, and your physical presence period is not a tax year but simply 365 consecutive days.
I passed the physical presence test last year. Do I automatically qualify this year?
No. You are required to qualify for the Foreign Earned Income Exclusion with each new year. This may first be done via the Physical Presence Test. Once you have been a tax resident of your foreign home for a complete calendar year, you might re-qualify for the FEIE via the Bona Fide Resident Test. However, to ensure qualification, you should make sure to meet the 330 day requirements for two years before qualifying via the Bona Fide Resident Test.
Is my tax year affected by the physical presence test?
No. It might seem confusing, but you still only report income earned during the standard tax year. Your twelve month period does not have to fit neatly within that year, but you will only claim benefits for the specific days that do.
What qualifies as a full day?
In order to count toward your count of 330, you must be in a foreign county for a full day. This is referred to as a "full foreign day". This term is defined as midnight to midnight, and anything less will not count toward the required 330. Partial days do not count, and there are not any exceptions to this rule.
How do I count the days I am traveling to and from the US?
A full foreign day is midnight to midnight on foreign soil, so the days spent traveling to and from your foreign home cannot count as full days.Traveling may also cause you to lose days, but midnight to midnight on foreign soil is the only way to achieve a full foreign day.
I am qualifying for the FEIE, do I have to be working each full foreign day?
No. To qualify toward your 330 days, you simply need to spend the entire day in a foreign country. How you occupy the time is not relevant.
Do the 330 qualifying days need to be contiguous?
No. The 365 days (12 month period) is contiguous, but the 330 full foreign days need not be. You can leave and then return several times within the 330 day period and still qualify. However, one should be very careful that each day claimed is actually a full foreign day. To allow for travel delays, it's better to plan to be in your foreign home (or another foreign county) for at least a few more days than is actually required.
If I am away from the continental US for a full day, but I spend part or more of that day in US territories or possessions, does that count as a full foreign day?
No. Only full days spent in foreign countries count. US territories and possessions do not count as foreign countries for the purposes of the PPT. An exclusion/credit is sometimes available for these situations, but that is a separate matter.
Do days spent in international waters count?
When determining your 330 days, the focus should be on time spent within a foreign country rather than time simply spent outside of the US. International waters do not count as a foreign country. It is possible to gain full foreign days while on an international cruise, but it requires that you spend a full foreign day actually within one of the counties on your route.
What if I face a family emergency or even a national emergency? Are there any exceptions to the 330 rule?
No. There are absolutely no exceptions to the 330/full foreign day rule. If you cannot report all 330 days, you will not pass the PPT and will not be eligible for the Foreign Earned Income Exclusion. Anyone who suggests otherwise is misinformed.
I spent 329 1/2 full foreign days during my 12 month period. Is there a partial benefit for this?
No. There is not a partial benefit or way to qualify for a percentage of the FEIE. You must prove 330 out of 365 days. However, you decide the start of your 365 day period, so it is unlikely that you would come up with 329 ½ days.
What is the best way to plan my time in and out of the US in the first year and still be sure that I qualify?
To avoid mistakes, it is always wise to plan for a buffer of a few extra days. Five days can be used up quickly by an unexpected family emergency or death. You would not want to miss an important event simply because you could not come to the US for reasons of tax benefits. One should always allow for one such emergency, and plan for two if possible.
How should I plan my US travel after passing the PPT?
It is wise to maintain a 330 day rule, meaning you always have 330 full foreign days in the immediately prior 12 months. This is recommended so that if, for any reason, your purpose for being overseas ends abruptly you will qualify for the FEIE up until your very last day on foreign soil. It's also the best way to "plan" for emergencies that would require travel to US soil or territories.
My W-2 reports income for the tax year. Does this affect my PPT? Should I inform my employer of what time period I am using to count my full foreign days?
Your W-2 simply reports income you have earned during the calendar year. Your tax year and your PPT time period do not have to coincide and when they do not, they do not affect one another. You are not required to report your PPT period to your employer and it will not affect his/her reporting or filing.
I will not have reached 330 full foreign day requirement by tax time. What do I need to do?
Remember that you have until June 30th to file while living overseas, but you may also need to file for the additional extension. If you file before you have passed the PPT, you will not qualify for the Foreign Earned Income Exclusion. If this happens, you will receive a tax bill from the IRS just as if you had earned your wages on US soil. The foreign filing extension is in place to aid you, and you should take advantage of it until you have passed the PPT. You need to wait to file your tax return until you have qualified for the exclusion.
Instead of filing an extension, should I file my return without the exclusion and amend it later?
As long as you can do so within the granted extension period (up to October 15th if requested), it is better to file your return right the first time. This is a better use of both your and the IRS' resources, and it will speed the refund process as well. It's worth mentioning that amended returns are much more likely to result in an audit than a return that is completed (assumed) accurately the first time.
If I am audited, how do I prove my travel dates to the IRS?
The IRS is not specific about what documentation is required, leaving that largely to the auditor's better judgement. It is wise to keep a travel log in addition to plane ticket stubs and any other documents that might support your claims. Sales and credit card receipts can also be helpful. If your travel is related to business, your employer may be contacted for additional documentation.
I.J. Zemelman, EA is the founder of Taxes for Expats