How do partial years work for the foreign income exlusion? If you start work half way into a year do you pro-rate the exclusion amount?

[pk · Accepted solution]

Once you have qualified for the physical presence or bonafide resident tests ( form 2555),  then the  first year's ( the partial year) exclusion max will be an allocated amount based the number of days  abroad.  You can now  ( if you are abroad, then it is June 15th )  either file a normal return including the foreign income   and then when qualified file an amended return    OR   get an extension and file a proper return ( i.e. with foreign  earned income exclusion in effect ) when you qualify.

[Paulhf]

My daughter resides in the UK as of 8/24/2018.   I am now trying to file an amended return since she has been in the UK for a year as of 8/24/2019.   Turbotax is responding that she is not eligible for the exclusion based on the bonafide resident test.  is there something I need to enter in Turbotax so the program will recognize that she is eligible since she has been a resident for over a year.

[pk]

Bona-fide resident status requires IRS approval.  Most Ex-Pats use physical presence test  ---using a test period of continuous 12 months ,  show that the person has been away from the USA  at least 330 days( 24 hr. ) .

From what I see in your post, you should use test period of 08/26/2018  ( assuming her leaving USA on 8/24/2018 and arriving in the UK on 8/25/18 -- the first full 24 day being therefore 8/26   ) through 8/25/2019 and show her travels to the USA  for any reason as required  for the form 2555.  This should qualify her for foreign earned income exclusion --- note that this is allocated  based on the actual days present in the UK and earned  from a foreign entity.

Does this make sense ?

[Paulhf]

Thanks.  Will try this approach as was not aware that the bonifide resident approach required first getting the IRS approval.  Makes sense in terms of how to approach the physical presence test.

[Paulhf]

As an update, my daughter does not quality for the Physical Presence test since she travels back to the US on business and vacation enough (41 days) not to hit the 330 day out of 365 day threshold.

But she will qualify for the Bona Fide residence test retroactively to 8/25/2018 once she is one full tax year resident in the UK which occurs on 12/31/2019.  I do not see any requirement for Bona Fide Residence Pre-Approval in IRS PUB 54.   

Key is that an individual cannot file a Bona fide residence amended tax return until have residence for one full tax year. 

[pk]

I will look for Regs published by the IRS but in the meantime  here is one quick ref :-->

https://wcginc.com/kb/what-is-the-bona-fide-residence-test/?gclid=EAIaIQobChMIuvS9summ5QIVMBitBh0KpA...