Physical presence

One of the drawbacks of being an American expat is a very stupid law that dictates how much time a citizen can spend at home. If I want to have tax-exempt status on my foreign income, I have to establish that I am not a resident of the U.S. According to the United States government, I can only be considered a non-resident if I am outside the U.S. for 330 days or more per year. This gives us only 34 days to spend in our home country.

It goes something like this: Even though I have a home and job in Korea, if I go back to the U.S. for 35 days, I am then considered a resident of the United States. Thirty-five out of 365 apparently means I’m living there. This is not only a monumental flaw in common sense, it is unique in the world. The U.S. has the most restrictive length of stay of just about any developed nation in the world. I was talking to a friend from the U.K. the other day who told me that he can be in his country for 6 months and still claim South Korean residency.

What surprises me is that I’ll talk to U.S. friends here who have no knowledge of this law. In fact, I’d say the majority of people I talk to are unaware of it. So university teachers and professors who get summers off spend two months or more in the States and don’t give it a second thought.

Many don’t even file taxes, which you’re still supposed to do every year. You fill out a form (2555-EZ) plus your 1040 and send it off. The 2555 form has two “tests.” The one involving the 330 days is called the “physical presence test.” You have to claim you were out of the U.S. for that period of time and then state the dates you were gone. When I bring this up with foreigners, the first question is always “How are they gonna know?” — as in, how will the government catch you if you lie. What I’ve been told is that if you’re audited by the IRS, they can access passport scans.

The reason I’m bringing this up now is that this is the time when people talk about their summer plans. I have a friend’s wedding in late August in Portland that will take up a week of my 34 days. I would love to also visit my sister on the East coast, but there’s simply not enough time. It’s this way every year. It’s also the reason why I spend my winter breaks traveling around Asia or Europe rather than going to the States.

I’m probably being extra paranoid about this stuff, but I look at it this way: One of my original reasons for coming here was the opportunity to save a good chunk of money every year. The amount of money that I manage to save every year is about the same as what I might get taxed in a normal employment situation every year. (Actually, I save more than that, but it’s close.) If I were to cheat, then come back and get audited, I’d have to pay all those back taxes, which would be a lot of money. Collectively, I would owe about the same amount that I’d worked so hard to save. So, as much as I would love to stay in the U.S. for a couple months every summer, it’s not worth the stress. I choose to keep things legit for no other reason than peace of mind.

I should add that I’m no specialist in tax law. This is an extremely convoluted, not to mention totally fucked-up, law. I might have some of the details wrong. But I have had many, many conversations about this. Everytime someone reacts with disbelief and anger I say “Hey, go look it up yourself. If you can find anywhere that I’m wrong I’d like to be the first to know.” But that’s never happened. (You can read about it yourself here.)

So I’ll enjoy my 34 days (actually this year it’s 32), eat a lot of good California Mexican food, see friends and family, and then come back to my home, my real home, in South Korea.

Advertisements

15 Responses to “Physical presence”

  1. I looked into this recently. You’re only required to pass one of the two tests (either the Bona-Fide resident or the physical presence). If you spend more than 34 days in America, you would fail the physical presence test, but you would still pass the Bona-Fide resident test, thus, you would be eligible for a foreign-earned exclusion of up to $87,000 or so.

  2. haha I read some more… the Bona-Fide residence test only applies if you are working in a country for a full year from January 1-December 31. So if your contract starts January 2 and goes to January 1, you would not be considered a bona-fide resident. that is some BS.

    But if you end up working more than one year, the time before Jan 1 and the time after Dec. 31 will be included as part of your tax-exempt time.

    Note to self, have all my contracts written from Jan 1-Dec 31 so I won’t be stuck in a foreign country for more time just to be exempt. It’s a ridiculous law.

  3. Mexican food!?!!!!!!!!!!!

  4. Jeremy, thanks for pointing out the bona fide residence test. I’d been focusing so much on physical presence, I forgot about that other test. Actually, for me, going forward I might meet that requirement, so I don’t have to worry about PP.

    You’re right, for the former, you have to be there a full calendar year. So in your example, you wouldn’t be considered a resident. Bona fide residency seems designed for people who have an indefinite (i.e. open-ended) employment and residency situation. So even if you changed your contracts to go from Jan 1 to Jan 1 you still wouldn’t pass the test because it’s a limited contract. BFR is only for long-term residents.

    In my case, I’ve been working under limited contracts. For example, I’ve had two one-year contracts (March to March) and one 6-month contract (March through August). These are 1) temporary and 2) not within a single calendar year. So for the 2 1/2 years I’ve been here, I’ve been honed in on the other test: physical presence.

    But starting this September, my university is (once I sign my new employment agreement) going to offer me open-ended employment as a full-time professor. No more 1-year contracts. So I then shift to bona fide resident. I become a long-term resident, not a limited one. (Actually, this changes for me on January 1, 2010. So when I do my taxes next April, I’ll have to stick with PP.)

    What’s not clear is how much time one can spend in the U.S. under the bona fide status. It appears to not have a limit. So… if I’ve got this right… I have to thank you Jeremy. :) Under my current employment situation, I’m still under PP. But with my new situation I can shift to BFR.

    I hope I’ve got that right. More info here:
    http://www.irs.gov/businesses/small/international/article/0,,id=96960,00.html

  5. Just to be a little more clear on the “open-ended” aspect. Here’s the part I’m getting at:

    “If you go to a foreign country to work on a particular construction job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer.”

    The key words being “…for a specified period of time…” A one-year contract is a specified period of time.

    But again, it’s not clear. The BFR test is not nearly so exact as PP. I guess if you get audited, you can establish proof of actual residency and are thereby okay.

  6. My point all along!

    ….actually my point was more like, You’ll never take me alive, copper!

    But same difference.

  7. hmmm… interesting very interesting… I’m wondering if the BFR would work for me on my two year contract or not…

  8. Here’s a question: Have you actually paid taxes in America? Or did you find any work-around?

  9. I haven’t had to while I’ve been in Korea because I’ve met the exemption requirements. Less than $87k in foreign income and passing the physical presence test. I submit my tax forms every year, but don’t have to pay.

  10. Ok, so the 12 month physical presence test is just 12 consecutive months, not needing to be Jan-Dec. of a tax year.

    Still, for a country that’s supposed to be free, our tax laws sure seem to say the opposite!

  11. czechMates Says:

    Suggestion: Spend a few bucks and get a definitive explanation from both a Korean and / or a U.S. tax acountant.
    Preferably, one who is also an attorney. Ask them to support their opinion with written documentation and have them send a copy of the documentation to you. This is way too big of an issue. Assuming a statute of limitations, of say seven years maybe, you don’t want to get down the road seven years or so and find out in the year 2020 or so that you have a large tax liability, plus interest, plus penalties. And you may want to contact the IRS in the U.S. also. Rremember: The IRS is relentless—in addition to being the chief rule-maker on these types of issues.

  12. (sigh)…

    You’re absolutely right. Thanks. What a freakin’ hassle.

  13. Hello All,
    I am confused on the physical presence test. If I came to US for only 35 days , does that conclude that i meet the physical presence test? 35 days +330 in foreign county = 365…but IRS doesn’t want you to include travel dates??????????? So 35 days in US might = less than 330 days in foreign country and therefore not meet the PP test?

    What a lawwwwwwwwwwwww

  14. I don’t think you meet the test. The way I understand it is you can only be there 34 days. You need to put the dates in your IRS form when you submit your taxes.

    Of course, all of this means nothing if you don’t get audited. :)

  15. Just to clear up a few points…

    When looking at the number of days in the US, travel days (or partial days) don’t count. It must be a complete day midnight to midnight on American soil. This would also mean that travel days in flight to say Hawaii would also not count as you are traveling over international waters and are temporarily out of US jurisdiction (similar to taking a cruise ship ride into international waters to gamble).

    You can also shift the 330 day period. Let’s say you were in the US for 45 days from July 1, 2009 – August 15, 2009. If you could say your period was from July 1, 2008 – July 1, 2009 for the first period of 365 days and then again from August 15, 2009 – August 15, 2010 for the second period, then haven’t you still met the requirement? (Provided you did not return to the US during any of those two other periods).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: