Physical Presence Test

What is the Physical Presence Test?

The Physical Presence test is one of two tests (the other being the Bona Fide Residence test) that a taxpayer can use to qualify for the Foreign Earned Income Exclusion. By qualifying for the exclusion, a taxpayer can exclude up to $120,000 (2023 figure) of qualifying income from U.S. taxation.

Do I Pass the Physical Presence Test?

To pass the Physical Presence test you must spend 330 days during a 12-month period outside of the United States. The 330 days don’t have to be consecutive, they don’t have to be for employment purposes, and they can be spread across multiple countries.  Your tax home also needs to be in a foreign country (more on that below).

To pass the Physical Presence test you must meet all three of the following requirements:

1. Your tax home must be in a foreign country.
2. You must have foreign earned income.
3. You must be a U.S. citizen or resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

How Do I Establish a Tax Home in a Foreign Country?

To qualify for the Foreign Earned Income Exclusion under the Physical Presence test or the Bona Fide Residence test, you must establish a foreign tax home. This is way easier than it sounds.

The IRS defines your tax home as: your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence…your regular place of abode (the place where you regularly live).

Basically, your tax home is where you regularly live and work. Live and work in a foreign country, your tax home is in a foreign country. With one caveat…

Again, from the IRS: You aren’t considered to have a tax home in a foreign country for any period during which your abode is in the United States.

Alright, got it. I can’t have an abode in the United States… what does that mean? If you own a house, rent it out. If you own a car, sell it or put it in storage. If you have a family or pets, its best to bring them with you. These three things are by no means an exhaustive list, but it’s certainly difficult to argue your abode is outside the United States, if your house and family are still there.

What Counts as a Day for the Physical Presence Test?

This may sound like a silly question, but the IRS will get very technical in their efforts to disqualify you from passing the Physical Presence test. A day must be a full period of 24 consecutive hours, beginning at midnight, where you are physically present in another country. That’s right, you must be in another country (or in the air over that country), not just outside the United States. This means if you’re leaving the United States by plane and you’re in the air over the United States, or international waters, at 12:01 AM, that entire day will be disqualified as one of your 330 days.

What About Days I am in Transit or Passing Over a Foreign Country?

You are free to move from country to country without losing a day towards your 330-day total. However, if you choose to take the slow boat from country to country you could lose some days. For example: if you decide to take a transatlantic cruise from Rio de Janeiro to Lisbon, the entire length of your cruise could be excluded from your 330-day total because you were not physically present in a foreign country, you were in international waters.

How Does a Layover in the U.S. Affect The Physical Presence Test?

Fortunately, if you’re traveling between two foreign countries and have a short layover (of less than 24 hours) in the United States, this won’t be counted against you. However, if you have a long layover in the United States, then a flight over international waters it could cost you a day. Seriously, the IRS is going to be that picky.

What If an Emergency Causes Me to Be in the United States?

The Physical Presence Test does not have caveats for illnesses, family issues, funerals, vacations, employer requests, or anything else. If you’re passing through the Miami airport, get sick, and end up in the hospital for three days, all three days could count against your 330-day total.

How Do You Figure The 12-Month Period for the Physical Presence Test?

The 12-month period must be consecutive, but it does not have to fall within one tax year. It does not have to begin on the first day you arrive in a foreign country or end when you leave. You can select any 12 consecutive months, beginning on one calendar day of the year and ending one day before that same day 12 months later. This could allow you to qualify so long as you never spend 35 days in the United States during any given 12-month period.

From the IRS: There are four rules you should know when figuring the 12-month period.

1. Your 12-month period can begin with any day of the month. It ends the day before the same calendar day, 12 months later.
2. Your 12-month period must be made up of consecutive months. Any 12-month period can be used if the 330 days in a foreign country fall within that period.
3. You don’t have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. You can choose the 12-month period that gives you the greatest exclusion.
4. In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another.

What If I Move in the Middle of the Year?

If you move in the middle of the year, you still need to reach 330 days of physical presence in a foreign country during a 12-month period. For most people, that means some of the days are going to be in the first tax year they move abroad, and the rest are going to be in their second year outside the country.

For taxpayers in this situation the exclusion will be prorated based on the number of days during your 12-month period that fall within each tax year. Therefore, if your first full day in a foreign country is July 1^st, you may qualify for only 50% of the Foreign Earned Income Exclusion (or $60,000 in 2023) in that tax year.

What If My Tax Return is Due Before I Reach 330 Days of Physical Presence?

Not a problem! In fact, most expats don’t file their tax returns on time and they aren’t penalized.  American taxpayers outside the country on April 15^th receive an automatic extension to file their return until June 15^th. If this two-month extension still does not allow sufficient time for you to reach the 330-day total, it’s best to request an additional extension. This can be accomplished easily as the IRS has a specific form just for this situation: Form 2350. With Form 2350 you can apply to extend your deadline to 30 days after you expect to hit the 330-day mark.  Unlike some other extensions, Form 2350 is not automatic. It is possible that the IRS will deny your request, so you should submit Form 2350 as early as possible.

It’s also important to note that while an extension provides additional time for you to file your tax return, it does not affect when tax payments are due. In other words, if you expect to owe taxes, payment should be made before April 15^th.

How Should I Keep Track of My Travel For The Physical Presence Test?

Taxpayers that wish to elect the Foreign Earned Income Exclusion using the Physical Presence test should keep accurate records of their travel. When completing the tax forms for the exclusion you must list each country in which you were located and the corresponding dates. If you’re moving around a lot, you may want to keep a running list throughout the year. You should also keep plane tickets, hotel reservations, or other proof of your location.

Can I Get a Partial Exclusion for Less Than 330 Days?

Let’s split some hairs here. Above I talked about moving abroad in the middle of the year and getting a prorated exclusion. In that situation you reached 330 days of physical presence in a foreign country during a 12-month period, your 12-month period just happened to cross into two different tax years.

This question is: “Can I get a partial exclusion for having less than 330 days of physical presence in a foreign country during a 12-month period.” The answer here is unfortunately no.   If you find that you were only physically present in a foreign country or countries for 329 days, there are no exceptions or partial exclusions.

You must be able to count 330 full days during 12 consecutive months to qualify (if that 12-month period reaches into two separate tax years, that’s fine). This part here is important folks: If you plan to elect the Foreign Earned Income Exclusion using the Physical Presence test, keep track of your days, plan accordingly, and please leave room for an unexpected trip to the United States, layover, or flight delay. Don’t let a 24-hour layover or emergency dentist appointment cost you thousands of dollars in unnecessary taxes!

“Hey dad, sorry I can’t make it to Grandma’s funeral. You know that IRS is a real stickler and I’ve already spent 34 days in the United States.”  – Don’t be that guy.

Do Digital Nomads Pass the Physical Presence Test?

Absolutely! As long as they spend 330 days of every 12-month period in a foreign country or countries and have a foreign tax home.

Do You Have Questions About the Physical Presence Test? Leave Them in the Comments Below!

Resources and Tax Forms:

• IRS Summary: Physical Presence Test
• IRS Summary: Foreign Earned Income Exclusion
• IRS Form 2555: Foreign Earned Income
• IRS Form 2555: Instructions
• IRS Form 2350: Application for Extension of Time to File U.S. Income Tax Return
• IRS Tax Guide for U.S. Citizens and Resident Aliens Abroad
• United States Income Tax Treaties – A to Z