Foreign Earned Income Exclusion switch methods question

[josephfolsomcpa]

I have a US citizen client that started working overseas in 2015.  He quit his foreign job and moved back to the US in Sept 2019.  He has qualified for the foreign earned income tax exclusion for tax years 2015-2018 under the physical presence test (the physical presence test has always been Jan 1st through Dec 31st).  He could also have qualified under the bona fide residence test. For tax year 2019, he doesn't qualify for the physical presence test since he wasn't in the foreign country for 330 days.  Can he qualify for the foreign earned income exclusion using the bona fide residence test for tax year 2019 (he meets the test of being a bona fide resident for an uninterrupted period that includes an entire tax year).  I can't seem to find an answer if this would work or not since he has used the physical presence test in all previous years.

[rbynaker · Accepted solution]

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@josephfolsomcpa wrote:

For tax year 2019, he doesn't qualify for the physical presence test since he wasn't in the foreign country for 330 days.

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The time period for the physical presence test doesn't have to be a calendar year.  Let's say, for example, that your client was in the foreign country from 1/1/18 - 7/1/19.  For the 2018 tax return you could use the period 1/1/18 - 12/31/18.  For the 2019 tax return you could use the period 8/1/18 - 7/31/19.   During that time period he was in the foreign country for 330+ days.  It results in a prorated maximum exclusion based on the portion of the 365-day testing period that exists in the calendar tax year (so in this case 7 out of 12 months or $61K+).

Rick

[josephfolsomcpa]

For tax year 2018, he used the time period 1-1-2018 through 12-31-2018, so for 2019, it would have to be 1-1-2019 through 12-31-2019, correct?  The question I have is if he can use the 2018 time to qualify for the bona fide resident test even though we used that same block of time for 2018 physical presence test.

[rbynaker]

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@josephfolsomcpa wrote:

For tax year 2018, he used the time period 1-1-2018 through 12-31-2018, so for 2019, it would have to be 1-1-2019 through 12-31-2019, correct?

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Incorrect.

[josephfolsomcpa]

Thanks for the help!  I really appreciate it.