Understanding Bona Fide Foreign Resident Status for Tax Benefits

Any resident of a foreign country who meets the Internal Revenue Service (IRS) criteria for the bona fide residence test. This test classifies any person who lives in any foreign country for an uninterrupted period that includes an entire tax year. A tax year is defined as the period from January 1 through December 31 for a bona fide foreign resident. Any individual falling into this category is eligible for the foreign earned income exclusion, which may significantly reduce taxable income and may exclude an individual’s housing expenses. Bona Fide Foreign Residents must be either U.S. citizens living abroad or resident aliens of a country with which the U.S. has a valid tax treaty in effect.

Criteria for Establishing Bona Fide Foreign Resident Status

Bona Fide Foreign Residence status is granted only to those who have solidified long-term foreign residence intentions.

Bona Fide Foreign Residence status is thus not automatically extended to an individual simply because they have lived in a foreign country for a year or more. For example, someone who travels to a foreign country for a finite contracted job, such as a construction contractor or a consulting function, does not automatically receive a Foreign Residence status—even if such work opportunities exceed one year in duration. Also, those who use golden visas to receive residency status may have to satisfy other criteria to be considered bona fide. The golden visa program allows a fast path to establishing foreign residency through making significant financial investments in the foreign country.

Practical Examples of Bona Fide Foreign Resident

For example, someone who travels to London to open an art exhibit at a museum, who is loaned a crash pad as temporary housing quarters, would not be granted Bona Fide Foreign Residence status. But an individual who purchases a home abroad and relocates their entire family to live overseas for the long haul would likely be granted Foreign Residence status—even if they leave the country for temporary trips back to the United States and other countries, for vacation or business purposes. However, in such cases, individuals must exhibit clear intentions of returning from such trips, without unreasonably lengthy delays, back to the foreign residence in question.

Determining Bona Fide Foreign Resident Status

The determination of a Bona Fide Foreign Residence status is decided on a case-by-case basis, factoring in such considerations as the length of time lived abroad and the nature of the reason for the relocation. The decision is ultimately made by the IRS, largely based on information an individual reports on Form 2555, Foreign Earned Income, which lets individuals calculate foreign earned income exclusion and housing exclusion or deductions.