What is the Foreign Housing Exclusion ?
The foreign housing exclusion, sometimes referred to as the foreign housing deduction or foreign housing allowance. This can help limit the tax liability of expats. With a little foresight and proper preparation, this exclusion increases the affordability of living abroad. If you plan to use the foreign earned income exclusion (FEIE) as well, this deduction doesn't require any additional paperwork.
The Foreign Housing Exclusion or Deduction allows U.S. taxpayers living abroad to deduct or exclude the cost of rental housing abroad from their gross income on their U.S. tax return. The Foreign Housing Exclusion reduces the tax liability of an expatriate by allowing certain housing expenses to be deducted from taxable income. This exclusion is based on a significant portion of their foreign housing expenditure.
It was created by the IRS to cover expenses incurred as well as living abroad. But, it can only be claimed by self-employed expats. It does not reduce the self-employment tax for expatriates abroad. The foreign housing exclusion is calculated in Parts VI, VIII and IX of Form 2555.
How the Foreign Housing Exclusion Works ?
The FHE amount is the sum total of your foreign housing expenses for the year minus the housing amount. The calculation of the base house amount is linked to the maximum foreign earned income exclusion. Housing expenses include reasonable expenses actually paid or expended for housing abroad for you and for your spouse and dependents. Housing expenses do not include the cost of purchasing property, the cost of food, improvements or other expenses that add value, such as purchasing furniture or accessories. Your housing expenses cannot exceed a certain limit. The foreign housing exclusion will not reduce your self-employment tax, it only lowers your regular income tax. Please see Instructions for Form 2555 and Chapter 4 of Publication 54, Tax Guide for US Citizens and Aliens Resident Abroad, for more information.
Who is Eligible for Foreign Housing Exclusion ?
If you live abroad, you can deduct foreign housing costs by claiming for Foreign Housing Exclusion, but you must meet the following requirements to qualify for FHE :
- Must be a US citizen or resident alien.
- Must have foreign earned income.
- Your tax home must be in a foreign country.
- You must complete either the actual residency test or the physical presence test.
If you and your spouse live in the same foreign household and file a joint return, you must calculate the amount together. If you file a married filing separately, only one spouse can claim the exclusion.
Who Qualifies for the Foreign Housing Exclusion ?
Any US citizen renting an apartment abroad can claim the foreign housing exclusion. Like to qualify for FEIE, you must live in a foreign country and qualify under a physical presence test or bona fide residency test. In addition, to use the foreign housing exclusion, your housing costs must exceed 16% of the FEIE amount for a given tax year and you must have already paid for those expenses.
1) Bona fide Residence Test :
You must qualify as a de facto resident of a foreign country for an uninterrupted period that covers an entire tax year.
2) Physical Presence Test :
You must be in a foreign country for 330 or more full days out of a 12-month period.
What is the Maximum Exclusion Amount Under the Foreign Housing Exclusion ?
The maximum expense you can exclude under the FHE will depend on the original housing the Internal Revenue Service allows you and the total amount of your housing expenses, depending on your location. Your qualified expenses also cannot exceed your foreign earned income. The IRS provides a base housing amount of 16% of the Foreign Earned Income Exclusion to US expats. Because different cities have different costs of living, the maximum amount will depend on where you are currently living.
What are the Qualified Housing Expenses under Foreign Housing Exclusion ?
Rent and utilities are qualified expenses, such as home repairs, parking, real and personal property insurance and ancillary rent. Mortgage payments, domestic labor, the purchase of furniture or other housing expenses will not qualify for the foreign housing deduction.
|
Qualified Housing Expenses |
Non-Qualifying Housing Expenses |
|
Rent |
Mortgage payments |
|
Utilities (except for telephone, TV services, and
internet) |
Domestic labor (maids, housekeepers, etc.) |
|
Personal property insurance (such as homeowner’s
or renter’s insurance) |
Purchased furniture |
|
Leasing fees |
Anything deemed “lavish or extravagant” |
|
Furniture rental |
|
|
Parking rental |
|
|
Repairs |
How Much is the Foreign Housing Exclusion ?
The foreign housing exclusion or deduction amount is equal to your total foreign housing expenditure (up to 30% of the Foreign Earned Income Exclusion) for the year, minus the base housing amount (which is equal to 16% of the Foreign Earned Income Exclusion). For tax year 2023, the maximum housing exclusion amount is $19,200.
How to Calculate your Foreign Housing Exclusion ?
To calculate your foreign housing deduction, first tally your qualified expenses. Your overseas housing amount is the sum total of your overseas housing expenses for the year, minus the housing amount. The calculation of the base housing amount is linked to the maximum foreign earned income exclusion. The FHE amount is 16% of the maximum exclusion amount, divided by 365 and then multiplied by the number of days your qualifying period falls within your tax year.
When your qualifying expenses exceed the base housing cost, you can exclude your total eligible expenses up to the maximum amount allowed for the tax year. You may be able to use the additional amount for the foreign housing exclusion if you live in a city that is identified by the IRS as having an extremely high cost.
The current list is included in the Internal Revenue Service's instructions to complete Form 2555 beginning on page 7. Be sure to check your location as each city has a different amount.
Foreign Housing Exclusion or Deduction Limits
The housing expense limit is typically 30% of the maximum foreign earned income exclusion, but this can vary depending on where you incur housing expenses.
Foreign housing expenses cannot exceed the individual's total foreign earned foreign earned income for the taxable year. The foreign housing deduction cannot exceed their foreign earned income less than their total FEIE, plus their housing exclusion. The housing expense limit is calculated using the worksheet on page 3 of the Instructions for Form 2555.
How to Claim the Foreign Housing Exclusion ?
You would claim your foreign housing exclusion on Form 2555, the same form you would use to file for foreign earned income exclusion.
Foreigners must file this form with their tax return before the IRS filing deadline. Keep in mind, you need to submit regular Form 2555, not Form 2555-EZ, to claim the foreign residence exclusion.
You must report your housing expenses on your Form 1040 (on line 36, in the adjustment category, to be specific). You will be able to claim the foreign residence exclusion once, if you are married and filing jointly.
Foreign Housing Exclusion FAQ's
Can I benefit from the foreign housing exclusion if I work for a US company but live abroad ?
Yes., Your employer's location is not important to the IRS. The Internal Revenue Service cares that you qualify for FHE.
How do I calculate my excluded income under the Foreign Housing Exclusion ?
Here's how you can calculate excluded income under the Foreign Housing Exclusion with Form 2555 :
- Calculate your total housing expenses abroad for the entire tax year.
- Calculate your foreign earned income exclusion that is due in your US tax return.
- Subtract the base amount from your eligible housing expenses to determine your housing amount.
- Make sure that your housing expenses do not exceed the maximum housing expenses of your place of residence.
- Add the housing amount to the FEIE limit, so you can take the entire figure out of income tax.
Married migrant couples have to calculate housing expenses together. In the case of a self-employed US expatriate, you will file a claim for the foreign housing deduction in Part IX of Form 2555. In some situations, migrant spouses cannot live in the same household, in which case, each partner must separately file their Foreign Housing Exclusion claim based on their tax return.
What if I moved twice during the year ?
If you move your host abroad home, you will need to report your accommodation expenses for each location. Keep in mind that the number of days you spend in each location will determine which housing expenses you can exclude.
What Expenses Can I Use Under the Foreign Housing Exclusion ?
A wide range of housing expenses are eligible for Foreign Housing Exclusion or deduction. Qualified housing expenses that the foreign housing exclusion may include include utilities (excluding telephone charges and TV services), necessary repairs, property insurance (including materials), furniture or accessories rental, residential parking, occupancy tax, leasehold acquisitions. Includes fees and rent for, or the fair rental value of, accommodation provided by your employer.
What are the expenses that I cannot cover under Foreign Housing Exclusion ?
Under Foreign Housing Exclusion, you cannot cover any foreign housing expenses considered fancy or lavish. Housing expenses do not include the cost of buying a property, mortgage payments, home improvement projects, furniture purchased and household labor (such as hiring someone to cook or clean).