Post: #1

I'm aware of the thread here /thread-6236.html about the foreign earned income exclusion for USA tax payers, however all the discussion in that thread pertains to claiming the foreign earned income exclusion based on the "physical presence test" which means you stayed outside of the USA for 330 days for 12 consecutive months.

There is a second test, the "bona fide residence test", which you can use to claim your foreign earned income exclusion. However this test seems much less straight forward and the IRS website says they determine if you qualify under that test on a case by case basis.

The advantage of claiming the exclusion under the bona fide residence test is that you can come back to the USA for business or vacation more than just 35 days per 12 months, however they don't tell you a specific number of days you can be in the USA and still qualify. From everything I've read the bona fide residence test just means you live outside of the USA for an indefinite amount of time, like there is no scheduled day on when you will be returning to live in the USA, but you also make short trips back to the USA once in awhile.

I've attached an image of what they ask you on the foreign earned income form to determine if you can claim under that test (form 2555).

My question is does anyone have any experience using the bona fide residence test to claim the foreign earned income exclusion? What's the max amount of days you were in the USA and still qualified? Did you pay income tax in the foreign country? It also asks you what type of visa you entered the foreign country and if it limited your stay... any insight on how this affects whether or not you qualify?

The table in #14 only refers to # of days in USA on "business" but I'm assuming you would still have to log it if it was just a vacation (which is also allowed after the 35 days per 12 months limit according to the IRS website - if you qualify under the bona fide test.)

As you can see if you decided to spend more than 35 days in the USA per year assuming you'd still be able to claim the exclusion under the bona fide residence test, and then it comes back that you didn't qualify and now you have to write a fat check to the IRS, that would suck.

I'll probably talk to some accountants before I decide to return past the 35 day limit of the physical presense test but I wanted to see if anyone here had any experience claiming under the bona fide test and what info they can give to determine if we will qualify.

Thanks

Post: #2

This is my third year doing a 673 physical presence test. With that being said you should keep all documentation with you to prove that you were out of the USA. Passport stamps, flights, rental agreements and other bills will work. I seriously do not recommend doing the bona fide residents test. This is where the IRS are a bunch of dirt bags and make this a gray area to potentially fuck you. They do not specify anything and leave it up to interpretation. I have contacted 3 accountant firms that specialize in this and they all told me that I should avoid doing the bona fide test. I even emailed the IRS 3 times asking this and they have not sent me an answer.

Back when black water was black water ( military contracting) a lot of these guys filed a bona fide resident test and with their check off list such as having to pay rent, taxes, having an Iraqi bank account plus local ties. With this you do qualify as a bona fide resident. But all these guys got flagged by the IRS audits were performed and they garnished a lot of guys who still abided by test. I know two guys I work with here who perfectly fit that test and still got fucked by the government. But when you stay out of the USA for 330 days with proof they cant do shit to you because its in black and white about whats required. If you still really want to do the bona fide test I would start calling up companies who specialize in the 673 form.

You should use an accounting firm to file your bona fide 673 form because they will be legally responsible as well if the IRS decides to flag you. Then what happens is the accountant firms lawyer will represent you in court.

This is the company I use,
[email protected]

Post: #3

(01-13-2016 01:28 PM)CallSignBigRed Wrote:  This is my third year doing a 673 physical presence test. With that being said you should keep all documentation with you to prove that you were out of the USA. Passport stamps, flights, rental agreements and other bills will work. I seriously do not recommend doing the bona fide residents test. This is where the IRS are a bunch of dirt bags and make this a gray area to potentially fuck you. They do not specify anything and leave it up to interpretation. I have contacted 3 accountant firms that specialize in this and they all told me that I should avoid doing the bona fide test. I even emailed the IRS 3 times asking this and they have not sent me an answer.

Back when black water was black water ( military contracting) a lot of these guys filed a bona fide resident test and with their check off list such as having to pay rent, taxes, having an Iraqi bank account plus local ties. With this you do qualify as a bona fide resident. But all these guys got flagged by the IRS audits were performed and they garnished a lot of guys who still abided by test. I know two guys I work with here who perfectly fit that test and still got fucked by the government. But when you stay out of the USA for 330 days with proof they cant do shit to you because its in black and white about whats required. If you still really want to do the bona fide test I would start calling up companies who specialize in the 673 form.

You should use an accounting firm to file your bona fide 673 form because they will be legally responsible as well if the IRS decides to flag you. Then what happens is the accountant firms lawyer will represent you in court.

This is the company I use,
[email protected]

Thanks a lot for that info. This is sort of what I was expecting. Pretty shitty it's not more defined, would be nice to have more flexibility and still be able to claim the exemption without the risk of losing it.

Another quick question: (assuming you're self employed) do you still pay the 15.3% self employment tax (medicare & social security) under the physical presence test?

Post: #4

From what I been told yes you will always pay the Medicare and SS tax. This also depends on which US state you file with as well. Right now like a dumbass im with a state that takes state taxes out on my income. If you can register with another state with no state taxes that will save you lots of money. The 673 only has to do with the federal taxes you pay.

Post: #5

(01-13-2016 03:44 PM)gang Wrote:  Another quick question: (assuming you're self employed) do you still pay the 15.3% self employment tax (medicare & social security) under the physical presence test?

Yes. 15% SE tax on profits if you're self employed, even if under the physical presence test. That sucks, doesn't it?

CallSignBigRed, thanks for the info about the bona fide resident test, was wondering about that option.

Post: #6

It's been said above but this is an incredibly difficulty way to go. I have discussed this with a very well respected tax attorney (i'm lucky to have access to him via family ties) and he has told me numerous times that even his wealthiest clients don't risk going down this path.

Post: #7

Thanks for this. I am thinking about using my taxable year to claim this, however this is giving me serious reservations, and would love to hear more anecdotals from those who have/have not claimed the Bona Fide Residence tax exclusion.

I have all of the above that would demonstrate foreign residence including a government issued residence ID that allows me enter my foreign country of residence without a visa.

Post: #8

Agree with Big Red. I'm working as a contractor as well, several of my buddies worked for BW and got audited after claiming the bona fide residency exemption.

Yes, you still pay the 15.3 self employment tax. Depending how your numbers run, it may be more advantageous to form an S corp or LLC, pay yourself a "reasonable salary" that is a percentage of your gross $, and take the rest as a distribution from the corporation. So you'll pay the payroll taxes + income tax on the salary portion, but only the income tax on the distribution portion.

Like I said, depending on what you claim as a "salary" it may be better to go this route rather than pay 15.3 percent on everything. How ballsy you are on the reasonable salary is the catch here.

This is not accounting advice, just my opinion.

edited to add: I second contacting Chris or Luke at Fairfield CPAs. I've used them and they're good to go.

Post: #9

How Digital Nomads Can Avoid Paying Social Security Tax
Social Security, Self-Employment Tax Eliminated

Here is an excellent article from a California lawyer.
http://hodgen.com/how-digital-nomads-can...urity-tax/
(I've met him. He does monthly online and in person seminars about int'l tax issues. His website has good information.)

"TL;DR: Why It Works

Social Security tax is imposed on “wages.” When an American citizen or green card holder works abroad for a foreign employer, the payment received for services rendered is not “wages” as defined for Social Security tax purposes.

Your foreign corporation is a foreign employer.

Therefore the compensation you receive for services rendered will not be “wages” for Social Security tax purposes. And as a result, no Social Security tax is imposed."

Post: #10

(01-16-2016 04:03 PM)buja Wrote:  How Digital Nomads Can Avoid Paying Social Security Tax
Social Security, Self-Employment Tax Eliminated

Here is an excellent article from a California lawyer.
http://hodgen.com/how-digital-nomads-can...urity-tax/
(I've met him. He does monthly online and in person seminars about int'l tax issues. His website has good information.)

"TL;DR: Why It Works

Social Security tax is imposed on “wages.” When an American citizen or green card holder works abroad for a foreign employer, the payment received for services rendered is not “wages” as defined for Social Security tax purposes.

Your foreign corporation is a foreign employer.

Therefore the compensation you receive for services rendered will not be “wages” for Social Security tax purposes. And as a result, no Social Security tax is imposed."

nice thanks for that!

Post: #11

(01-16-2016 04:03 PM)buja Wrote:  How Digital Nomads Can Avoid Paying Social Security Tax
Social Security, Self-Employment Tax Eliminated

Here is an excellent article from a California lawyer.
http://hodgen.com/how-digital-nomads-can...urity-tax/
(I've met him. He does monthly online and in person seminars about int'l tax issues. His website has good information.)

"TL;DR: Why It Works

Social Security tax is imposed on “wages.” When an American citizen or green card holder works abroad for a foreign employer, the payment received for services rendered is not “wages” as defined for Social Security tax purposes.

Your foreign corporation is a foreign employer.

Therefore the compensation you receive for services rendered will not be “wages” for Social Security tax purposes. And as a result, no Social Security tax is imposed."

Glad to see he's in Socal and only an hour's drive away. Really need to talk someone about my "exit in 2020" plan, never too early to start planning. Thanks for the heads up.