To qualify for the foreign earned income exclusion under the physical presence test, the 330 day requirement can fall within any 12-month period for which a part of is within the tax year. Here’s a step by step guide to how it works.
Disclaimer: US taxes for expats are complicated. This guide is only meant to serve as a general introduction to the foreign earned income exclusion and the physical presence test. It does not take the place of IRS publications and instructions. Please carefully refer to those when preparing your US tax return. We officially recommend that you hire a tax professional to prepare and file your US Expat tax returns.
Introduction to the 12-month rule for the foreign earned income exclusion’s physical presence test
US expat taxpayers that spend more than 330 days abroad in a calendar year generally qualify for the foreign earned income exclusion under the physical presence test. By “calendar year” I mean from the 1st of January through the 31st of December.
This is easy to understand.
The physical presence test, however, also allows expats to use any 12 month period in which some of the 12 month period falls within the calendar tax year.
When a 12 month period other than the calendar year is used, the taxpayer must allocate and claim a partial exclusion – which I will expand upon later.
It is important to realize that if there is no 12-month period that qualifies, a US Expat taxpayer cannot claim any exclusion at all (unless they qualify under another test method). You cannot allocate the exclusion by the number of days that you fall short of the 330-day test. You can change the dates around, but the 330 days is “all or none”.
Note also that you can, however, use a different 12-month period each tax year – even if you choose to use overlapping or periods already used in the previous year.
First, find a 12-month period in which you were present abroad
This can be any rolling 12-month period that falls partially within the tax year. It can be drilled down to the day.
For example, if you were in the United States in 2019 through the 12th of March, and then you moved overseas, had not returned to the US to visit, and remained outside of the US at least though the 11th of March of 2020 – then you have a 12-month period in which you were outside of the US for 365 days.
In this case, you easily pass the physical presence test for this 12-month period.
It would make sense in this example to use slightly different dates, however, and I will explain why in the next section.
Allocate the foreign earned income exclusion for the portion of the 12-month period that falls within the tax year
This is done to the exact number of days.
If your 12-month period is from the 30th of June 2019 through the 29th of June, 2020 (and you were filing in 2019) then you would qualify for 181/365ths or about half of the exclusion.
The formula actually takes the exclusion amount (which changes each year with inflation), divides it by the number of days in the year, and multiplies it by the days of your 12-month period that fall within the tax year.
In our example in the previous section we mentioned that you were out of the US for 365 days from the 12th of March 2019 through the 11th of March 2020.
If this is the case, we actually wouldn’t want to use this period. We would want to use a period that gets us the absolute most days that fall in 2019 so we can maximize our allowed exclusion (again – we are assuming we are filing for the 2019 tax year here).
Since the physical presence test requires only 330 days and not 365 days, it is more favorable to use the period from the 6th of February 2019 to the 5th of February 2020. In this 12-month period, you still qualify because you were present outside of the ‘States for 330 days.
Since there are 365 days in the 2019 calendar year and you were in the United States from February 6th to March 12th. That’s exactly 35 days, which leaves 330 days in the 12-month period.
By using this period, we get to claim 328/365ths of the exclusion.
If we use the original dates (the 12th of March through the 11th of March), we would only be able to claim 294/365 of the exclusion.
In summary, as long as you can find a 12 month period that falls in the tax year in which you qualify for the physical presence test, you can generally claim at least some of the foreign earned income exclusion.
You just have to allocate it by the amount in which your 12 month period falls within the tax year.
If you can not find a 12 month period in which you were outside of the United States for 330 days, then you do not qualify for any of the exclusion under the physical presence test. You might qualify under a different test method.