You live overseas, but you do spend some time in the United States every year. You want to know if you qualify for the Foreign Earned Income Exclusion, or the FEIE.
Your desire to claim the FEIE makes perfect sense: You can reduce your taxable income significantly. In 2015, the IRS reported that you could claim a full $100,800 in some cases.
That said, just wanting to qualify and feeling like you should doesn’t mean that you technically meet all of the requirements. Some tax experts warn that one of the most common mistakes they see on international tax returns is when someone claims the FEIE even though he or she would fail the physical presence test.
Physical presence test
The physical presence test is fairly strict, after all. You have to be in another country, over the course of 12 months, for a full 330 days. That leaves you with just 35 days — barely over a month — that you can spend in the United States and still pass. Once you hit that 36th day, you can no longer make your claim.
If you don’t pass the physical presence test, after all, you can’t use the exclusion.
You can imagine how quickly these days add up. Maybe you came home for two weeks to spend Christmas with your extended family. That’s 14 days. Maybe you dropped by for a birthday party or graduation and decided to stay for a week in the summer. That’s 21 days.
You only have 14 left. If you have to come to the United States for business, even if you’re just in New York or Los Angeles or Maryland for a few days, you eat through those two weeks in a hurry.
If someone asked, you’d say you spend almost 100 percent of your time overseas. You’ve come to feel like you live there permanently. You’re still connected to the U.S. due to your family and your past, but you don’t consider it your home.
This could be what leads so many people to claim the FEIE, assuming they pass the physical presence test, when they don’t. All of those quick business trips are forgettable. The vacation and the holiday trip rushed by. Your life is connected to a new country, a new living situation and the U.S. is an afterthought until it’s time to fill out your taxes.
There are other ways to qualify for the FEIE. For instance, the IRS notes that you could qualify, even if you’re a citizen of the United States, if you’re “a bona fide resident of a foreign country” for the whole tax year. It’s when that year gets interrupted that things grow more complicated, and you must know exactly how the requirements work.