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One of the most common questions we get asked is: “How is the foreign housing exclusion calculated?” Without knowing the equation on your own or having a foreign housing exclusion calculator lying around, you risk missing qualified expenditures for the deduction and not saving all the money that you could. So, to help expats on their quest to become tax compliant, we’ve developed a how-to guide – sort of a foreign housing exclusion calculator – that simplifies the equation so you know how much you can save. Let’s get started!
You qualify for the foreign housing exclusion the same way you qualify for the Foreign Earned Income Exclusion (FEIE): you’ll need to pass either the physical presence test or the bona fide residence test. The bonus is that you don’t need to complete any extra paperwork; when you qualify for the FEIE, you also qualify to use the foreign housing exclusion. Just remember to complete Form 2555 rather than Form 2555EZ, which does not include the qualification for the foreign housing exclusion. To pass the bona fide residence test, you must live in your home abroad for one uninterrupted calendar year. The physical presence test involves your physical presence in a foreign country for 330 days out of any 365-day period, so it can be a bit easier to qualify for if you need some extra time.
Keep in mind that the foreign housing exclusion is for employees only; if you are self-employed, you’ll want to use the foreign housing deduction instead. Though these will apply toward income tax, neither will reduce your self-employment tax.
Only qualified housing expenses are eligible for use with the foreign housing exclusion. In order to correctly use the foreign housing exclusion calculator, you’ll need to know how many of your expenses are eligible. Housing expenses that you can use in your foreign housing exclusion calculation include rent, utilities, and other reasonable housing expenses, but you’ll want to leave out the cost of buying property, purchasing furniture, mortgage payments, domestic labor, or making improvements to the property. Also, you can only use this exclusion if your housing costs exceeded 16% of the FEIE amount for a specific tax year.
The IRS changes the income limits for the FEIE each year to keep up with inflation, so the calculation of the foreign housing exclusion will need to use the most current rates. The FEIE is $112,000 in 2022. So, in order to perform the computation correctly, use the below equation; the foreign housing exclusion calculator:
Housing expense limitation (30% of the FEIE) – Base housing cost (16% of the FEIE) = Maximum housing exclusion
For 2022, the numbers are below:
($112,000 multiplied by 0.3) $33,600 – ($112,000 multiplied by 0.16) $17,920 = $15,680 (maximum exclusion amount)
The base housing cost is the IRS’ estimate of what it would cost to live in the US, so the housing limitation must be reduced by the base in order to determine what you can exclude. Remember, the base housing cost varies depending on how many days you spent abroad in the qualifying period for that tax year.
Please note: If you live in an ultra high-cost city (as defined by the IRS), you may be able to use an additional amount for the foreign housing exclusion. The list is in the IRS’ instructions for completing Form 2555 on page seven, and the amount varies depending on the specific location in which you live.
Even easier than using our calculator is leaving your taxes in the hands of our experts. Find out why we’ve helped over 9,300 expats worldwide become tax compliant with our foreign housing exclusion calculator. Get started with Greenback today!