Understanding the Physical Presence Test: A Guide for U.S. Expats

If you’re a U.S. citizen or resident alien living abroad, the IRS doesn’t forget about you come tax season. But there’s good news—under the Foreign Earned Income Exclusion (FEIE), you may be able to exclude a significant amount of your foreign income from U.S. taxes.

One way to qualify for the FEIE is through the Physical Presence Test, which is often the most straightforward method for digital nomads, contract workers, and short-term expats. In this post, we break down the requirements of the Physical Presence Test, give real-life examples, and help you understand whether this rule could save you money.

What Is the Physical Presence Test?

The Physical Presence Test allows U.S. taxpayers to qualify for the Foreign Earned Income Exclusion if they are physically present in one or more foreign countries for at least 330 full days during a consecutive 12-month period.

Let’s break that down

• 330 full days = full 24-hour periods, starting at midnight

• Foreign countries = anywhere outside U.S. territory (excluding international waters or airspace)

• The 12-month period can begin on any day and doesn’t need to match the calendar year

Why Does It Matter?

If you qualify, you can exclude up to $126,500 USD (for the 2024 tax year) of foreign earned income from your taxable income. For many expats, this can eliminate or drastically reduce their U.S. tax bill.

Who Should Use the Physical Presence Test?

This test is ideal for:

• Digital nomads

• Short-term overseas contractors

• Expats who move between countries

• Those who do not establish tax residency abroad

If you move frequently or are not tied to a long-term residence in one foreign country, the Physical Presence Test is often a better fit than the Bona Fide Residence Test, which has stricter residency rules.

Example 1: Remote Worker in Portugal

Sophie, a freelance writer, leaves the U.S. on May 1, 2023, and begins working from Lisbon, Portugal. She only returns to the U.S. for a 10-day visit in December 2023 and stays continuously in Europe the rest of the time.

She chooses a 12-month period from May 1, 2023 to April 30, 2024.

• During that time, she was in the U.S. for only 10 days

• She spent 355 full days in foreign countries

✅ She qualifies for the Physical Presence Test.

Example 2: Construction Consultant with Travel

James is a construction project manager based in Saudi Arabia. His contract starts on March 15, 2023. He travels to the U.S. for 20 days in October and another 15 days in March the following year.

He chooses a 12-month period from April 1, 2023 to March 31, 2024.

• U.S. days during this period = 35 days

• Days abroad = 330

✅ Just enough. James qualifies under the Physical Presence Test.

Example 3: Missed It by a Day

Maria, a tech consultant, works in Germany starting July 1, 2023. She returns to the U.S. for 40 days during the following spring due to family issues. She tries to claim the exclusion for the period July 1, 2023 to June 30, 2024, but she only has 325 full foreign days.

❌ Unfortunately, Maria does not qualify for the Physical Presence Test. Missing even one day matters.

What Counts as a Foreign Country?

According to the IRS:

• A foreign country is any territory outside the U.S., including its territories (e.g., Puerto Rico, Guam, U.S. Virgin Islands are not considered foreign for this purpose)

• International waters and airspace do not count

• Days spent in a foreign country during transit (like airport layovers) typically do not count unless you stay overnight or remain past midnight

How to Prove It

Be prepared to document your travel. Keep:

• Passport stamps

• Airline itineraries

• Travel calendars or work assignments

You’ll use IRS Form 2555 to claim the exclusion and report your qualifying days.

U.S. Tax Filing Still Required

Even if you don’t owe tax due to the FEIE, you must still file a U.S. tax return each year to claim the exclusion. Not filing can result in penalties and loss of benefits.

Physical Presence Test vs. Bona Fide Residence Test

Pro Tips for Success

• Avoid U.S. visits that break your 330-day count

• Don’t rely on memory—keep solid travel records

• Coordinate your 12-month period with your income-generating timeline for maximum benefit

Final Thoughts

The Physical Presence Test is a powerful tool for expats and remote workers to reduce their U.S. tax burden. But it comes with strict criteria. Missing the 330-day requirement—even by a single day—can cost you thousands.

Need help navigating expat taxes or determining which test applies to you? The experts at ModernAxis CPA can guide you through the Foreign Earned Income Exclusion, IRS filings, and international compliance with confidence.