In my last blog post, I explained the basics of the foreign earned income exclusion regulation.  One of the ways to qualify to the foreign earned income exclusion is by meeting the requirements of the physical presence test.  Now, I’ll expand upon those requirements and provide further detail.

As previously mentioned, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a consecutive 12-month period. In other words, you can only be present in the United States for a maximum of 35 days during that same 12-month period in order to qualify.  Full days are defined as a 24 hour period, and time on or over international waters in transit to or from the United States does not count towards the requirement.

Also, it’s important to note that the 12-month period does not have to be a calendar year.  In fact, it can be any consecutive 12-month period that you choose, beginning with any day of any month and ending the day before the same calendar day 12 months later.  It does not have begin the day you first arrive in the foreign country or end the day you leave, but rather can begin or end whenever you would like if it helps you qualify for the foreign earned income exclusion under the physical presence test.  Also, another plus is that 12-month periods can overlap one another if you have a longer stay abroad.

Does it matter if you are abroad for employment purposes or just for vacation?  Not at all.  You can be abroad for any reason and as long as you are physically outside of the United States, it counts towards the requirement of the physical presence test.  If you want, you can spend a month in Italy, then a week in Cambodia, then on to Australia for four months…whatever you want as long as you are not in the United States for more than 35 days in that 12-month period!   You can count days you spend abroad for any reason.   However, as mentioned in the last post, it’s important to note that you must first establish that your tax home is in a foreign country and outside of the United States in order to qualify for the foreign earned income exclusion.  If you can’t do that, then the physical presence test is not even a factor as you will be responsible as all wages earned abroad will be considered taxable income.

In summary, after you establish that your tax home is in a foreign country, plan your vacations to the United States accordingly.  If you plan such vacations without keeping the physical presence test in mind, you may lose out on qualifying for the major tax benefit for U.S. citizens living abroad.  So save those airline travel itineraries – they’re important!  They could save you thousands of dollars in taxes if you keep track of your time abroad properly!

Remember – Tax Planner CPA has an online physical presence test calculator !

9 Responses to “Expanding Upon the Physical Presence Test”