DEFINITION of Bona Fide Foreign Resident

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—defined as the period from January 1 through December 31, as 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.

BREAKING DOWN Bona Fide Foreign Resident

Bona Fide Foreign Residence status is not automatically extended to an individual, based merely because he or she has lived in a foreign country for one year. For example, one who travels to a foreign country for a finite contracted job, such as a construction position or a consulting function, does not automatically receive a Foreign Residence status--even if such work opportunities exceed one year in duration. Bona Fide Foreign Residence status is granted only to those who have solidified long-term foreign residence intentions. 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 his entire family to live there over the long haul, would likely be granted Foreign Residence status—even if he or she leaves 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.

How Status is Determined

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.