Tax regulations can be complex and the U.S. tax laws related to international transactions and taxation policies are no exception. One such complexity revolves around the Bona Fide Residency Rules which are critical in determining a person’s tax obligations.

This article, based on the information from IRM 21.8.1.5.2.1 (10-01-2019), aims to provide a simple and clear explanation of these rules, along with relevant examples to better illustrate the points.

Q1: What are the Bona Fide Residency Rules?

The Bona Fide Residency Rules stipulate that an individual can be considered a bona fide resident of a U.S. territory if they satisfy three conditions during the taxable year:

1. Passing the “Presence Test”,
2. Not having a tax home outside the relevant territory, and
3. Not having a closer connection to the U.S. or a foreign country than to the territory.

Think of it like this: if you’re planting a tree (your tax home), it should take root in the territory, not elsewhere. Your emotional, economic, and social ties should be stronger with the territory than any other place.

Q2: What is the “Presence Test”?

The Presence Test is one of the critical parts of the bona fide residency rules. It has several components, and you must satisfy at least one of them to be considered a bona fide resident:

1. 183-Day Rule: You should be present in the territory for at least 183 days during the tax year.
2. 549-Day Rule: You should be present in the territory for at least 549 days over three consecutive years, including at least 60 days each year.
3. 90-Day U.S. Presence Limit: If you’re in the U.S. for no more than 90 days in the tax year, and you’ve spent more days in the territory than in the U.S., you satisfy this rule.
4. $3,000 U.S. Earned Income Limit: If you earned no more than $3,000 in the U.S. for the tax year, you satisfy this rule.
5. No Significant U.S. Connection: If you had no significant connection to the U.S. during the tax year, you satisfy this rule.

Q3: What days are counted as being present in the territory?

In order to determine whether you pass the “Presence Test”, you’ll need to count the days you were present in the territory. Certain situations allow for days outside of the territory to be counted as days inside the territory, such as:

1. If you were outside of the territory receiving or accompanying a parent, spouse, or child receiving qualifying medical treatment
2. If you were unable to return to the territory during any 14 day period within which a major disaster occurs (this period can be extended, as it was for Puerto Rico and U.S. Virgin Islands due to the impact of hurricanes Irma and Maria)
3. If you were in transit between two points outside the United States and were physically present in the U.S. for fewer than 24 hours
4. If you were temporarily present in the U.S. as a student or a professional athlete to compete in a charitable sports event
5. If you were serving the relevant territory as an elected representative or a full-time appointed official or employee of the government of the relevant territory

Q4: When did these rules become effective?

These rules generally apply to taxable years ending after January 31, 2006.

However, taxpayers may choose to apply these rules to all taxable years ending after October 22, 2004. Understanding these rules can help individuals better navigate their tax obligations and make informed decisions about their residency status for tax purposes.

Remember, while this guide provides a simplified explanation of the Bona Fide Residency Rules, tax laws are complex and individual situations can vary greatly. It is always recommended to consult with a tax professional or a financial advisor when dealing with tax matters.

This article simplifies the concept from IRM 21.8.1.5.2.1 (10-01-2019). For more in-depth information, please refer to the original source.