The Foreign Housing Exclusion is a lesser known money saving tactic that can help limit tax liability for U.S. taxpayers living abroad. The Foreign Housing Exclusion, also referred to as the Foreign Housing Allowance or Foreign Housing Deduction, will help you increase the affordability of living overseas, with no extra filing. The team at Evolution Tax and Legal is breaking down this money saving trick for U.S. expats: who qualifies, how to claim the deduction, and how we can help you save money while living abroad.
What Are the Foreign Housing Exclusion & Foreign Housing Deduction?
The IRS created the Foreign Housing Exclusion and the Foreign Housing Deduction to help offset costs that an individual typically incurs when living overseas. They allow certain housing expenses to be deducted from taxable income, for U.S. citizens who take advantage of the exclusion.
Who Qualifies for the Foreign Housing Exclusion?
Qualifying for the Foreign Housing Exclusion means first qualifying for the Foreign Earned Income Exclusion (FEIE). To qualify for FEIE, an individual must pass either a physical presence test or a bona fide residence test. The bona fide residence test is passed when an individual is in the country of residence for an uninterrupted calendar year. The physical presence test is passed when a resident is physically present in their country of residence for 330 days throughout 12 consecutive months. The days do not have to be consecutive, which makes this an easier test to pass for those who have left the country throughout the year of residency.
After passing FEIE, an individual can qualify for the Foreign House Exclusion if their housing costs are 16% greater than their FEIE costs for the given tax year.
How Much & What Can I Exclude Under the Foreign Housing Exclusion?
Housing expenses typically include any expenses incurred or paid to cover the cost of housing the individual, spouse and any dependents. In general, the following are able to be excluded from the tax returns:
- Rent in the foreign country of residence.
- Housing utilities, not including phone bills, internet bills and cable provider bills.
- Homeowners insurance and renters’ insurance.
- Property fees.
- Leasing fees.
- Rental repairs.
- Cost of furniture and parking costs.
The amount that can be excluded each year depends on your foreign housing expenses for the tax year, minus the base amount that the IRS allows for housing. The base amount is currently 16% of FEIE, and the maximum amount depends on where the housing costs were incurred. The location matters because the IRS accounts for the cost of living in each country when determining the maximum exclusion limit. This can become complicated for expats who spend time traveling and incur housing costs in a variety of countries.
It is also worth noting that the foreign housing exclusion cannot exceed the total foreign earned income for the tax year, so incurring housing expenses outside the means of foreign earned income is not recommended for expats.
How To Claim the Foreign Housing Exclusion and Deduction
The Foreign Housing Exclusion can be claimed using the same form that an individual will file to claim FEIE, meaning there is no extra filing to be completed to receive this exclusion. This is Form 2555, and it should be attached to your individual tax return when filed.
To determine your housing exclusion amount, begin by calculating all qualified housing expenses you have incurred overseas for the given year. Then determine the amount of money that will be claimed under FEIE for the given tax year, and multiply this amount by 16% to determine your minimum expenses. Your housing costs must exceed this number to qualify for the Foreign Housing Exclusion. Utilizing the IRS instructions for Form 2555, you can determine the maximum amount you can exclude for the city in which you have incurred housing costs. To simplify this process, it is beneficial to speak with an expat tax attorney and ensure you are excluding the maximum amount for your personal finances and the city in which you reside.
Need Help Claiming the Foreign Housing Exclusion? Contact Evolution Tax and Legal
To ensure you are receiving the maximum exclusion amount for your situation, it is worth speaking to a seasoned tax professional. The team at Evolution Tax and Legal is experienced in the realm of international tax and we can work with you to determine your deduction amount and maximize your benefits as an expat. Contact the team at Evolution Tax and Legal to get started on saving on the cost of living overseas today.