The Foreign Housing Exclusion
If you're a U.S. citizen or resident living abroad, you're likely aware of the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of your foreign-earned income from U.S. taxes. But did you know that there's another benefit you may qualify for if you're incurring housing expenses abroad? It's called the Foreign Housing Exclusion.
What is the Foreign Housing Exclusion?
The Foreign Housing Exclusion allows individuals who qualify for the FEIE to also exclude certain housing expenses paid for with foreign-earned income. This benefit applies to U.S. taxpayers who are living and working abroad and meet either the bona fide residence or physical presence test, similar to the requirements for the FEIE.
What Expenses Qualify?
The exclusion covers reasonable housing expenses, which include:
- Rent
- Utilities (excluding telephone)
- Property insurance
- Parking costs
- Furniture rental
- Repairs
It’s important to note that certain items, like extravagant housing costs, are not considered reasonable and would not qualify.
How Do You Qualify for This Exclusion?
In order to take advantage of the Foreign Housing Exclusion, you first need to qualify for the Foreign Earned Income Exclusion (FEIE). This means you must either:
- Be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- Be physically present in a foreign country or countries for at least 330 full days during any 12-month period.
Once you meet the criteria for the FEIE, you can then apply for the Foreign Housing Exclusion.
How Much Can You Deduct for Foreign Housing?
The amount of housing expenses you can exclude isn’t unlimited. First, the IRS sets a base housing amount equal to 16% of the FEIE limit. Any expenses over this base amount can qualify for the exclusion, up to a certain limit. This maximum limit varies depending on the city or country where you live. Higher-cost locations, such as London or Hong Kong, generally allow for a larger exclusion, while lower-cost areas may have more modest limits.
For example, if the FEIE limit is $120,000, the base housing amount is approximately $19,200. If your total housing expenses are $40,000, your eligible housing exclusion would be $20,800 ($40,000 minus $19,200).
How to Calculate Your Foreign Housing Deduction:
To determine the amount you can exclude for foreign housing, follow these steps:
- Identify Your Qualifying Housing Expenses: Start by adding up the reasonable costs like rent, utilities, and insurance.
- Subtract the Base Housing Amount: This base amount is 16% of the FEIE limit, so it’s the portion of your expenses that isn’t eligible for exclusion.
- Apply the Maximum Housing Limit: Compare your eligible housing expenses to the IRS cap for your city or country. If your expenses exceed this cap, you can only exclude up to the maximum allowed amount.
Can You Claim Both the FEIE and the Foreign Housing Exclusion?
Yes! You can claim both, but your total foreign housing exclusion, combined with your foreign earned income exclusion, cannot exceed the total amount of your foreign-earned income.
Benefits of the Foreign Housing Exclusion
The Foreign Housing Exclusion can significantly reduce your taxable income, making it a valuable tax benefit for expatriates. By excluding legitimate housing expenses, you not only lessen your tax liability but also create more financial flexibility for life abroad.
Ready to Maximize Your Tax Savings?
If you're living or working abroad, understanding how the Foreign Housing Exclusion can benefit you is crucial. Whether you're already familiar with the Foreign Earned Income Exclusion or exploring all available tax-saving options, there may be more ways to reduce your U.S. tax burden than you realize.
I invite you to discuss your specific situation, ask all your questions, and see how you can benefit from this exclusion. Schedule a consultation today, and let’s explore how these provisions can work in your favor!
