Physical Presence Test
The Physical Presence Test is strictly a quantitative test, found on Form 2555 page 2 Part III
Qualifications on to Meet the Physical Presence Test
In order to meet the requirements for the Physical Presence Test under IRC Sec 911 you must:
- Be a U.S. citizen or resident alien and
- Be in a ‘foreign country’ for 330 full days (a full day is a complete twenty four hour period) of presence abroad out of any 12 month, 365 day (366 leap-year) fiscal consecutive period.
Thus, this Physical Presence Test period can incorporate a non-calendar period (fiscal period), as for example April 21, 20XX to April 20, 20XX.
Any full 24 hour cycle days not spent in a ‘foreign country’ will not count towards the 330 day count,
Foreign Country Defined
A ‘foreign country’ for the purposes of the Foreign Earned Income Exclusion, IRC Sec 911 is defined as any territory under the sovereignty of a government other than the United States.
‘Foreign country’ does not include ships or aircraft traveling in or above international waters. Nor does ‘foreign country’ include offshore installations which are located outside the territorial waters of any individual nation.
Additionally, the term ‘foreign country’ does include the country’s airspace and territorial waters, in addition to the seabed and subsoil of those submarine areas adjacent to the county’s territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources.
The term ‘foreign country’ does not include Antarctica or U.S. possessions, such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands and the Johnston Island.
Reasons to Choose the Physical Presence Test over the Bona Fide Residence Test
Typically the Physical Presence Test is used in years of transition, that is, in both years of expatriation from the U.S. to abroad and repatriation back to the U.S.
The Physical Presence Test places advantages over Bona Fide Residence Test in these transition years for the following three main reasons:
1) Slide days – if up to the point of expatriating or repatriating the taxpayer has been in a foreign country for more than a 330 full days in the 12 month fiscal consecutive period under Physical Presence Test, there is opportunity to use those 35 (36 leap year) or less days (365 (366 leap year) consecutive period less the 330 days required to meet the test) as slide days to increase the total days abroad for the purposes of calculating Physical Presence Test. This is accomplished by either sliding the taxpayer back (expatriating) or ahead (repatriating) respectively by those 35 (36 leap year) or less days. Therefore, using Physical Presence Test, the period covered by the FEIE may be extended by using the 35 (36 leap year) or less slide days in a U.S. person’s expatriating or repatriating years to increase the amount of fractional exclusion that can be claimed.
It is, therefore, prudent planning in the expatriating and repatriating tax years to limit the days back to the U.S., so that these potential 35 (36 leap year) slide days can be optimized to obtain excess FEIE. This results in the dollar FEIE amount for the tax year / 365 (366 leap year) days x 35 (36 leap year) days= applicable of extra FEIE;
2) Factor of timing – in transition expatriating years, meeting the Bona Fide Residence Test will encompass waiting for a full calendar tax year to elapse subsequent to the date of U.S. departure and prior to filing that year’s U.S. income tax return. Therefore, using the Physical Presence Test may allow if the qualifications are met a U.S. tax filing in advance, and
3) No U.S. Income Tax treaty/ Non-Discrimination Clause – in cases where the taxpayer is not a U.S. citizen and not a U.S. resident alien (green card holder) who is a national of a country that has an income tax treaty with the U.S. that contain a non-discrimination clause using the Physical Presence Test is the only option.