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!
Step One: Get Qualified for the Correct Exclusion
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.
Step Two: Get Your Expenses in Order
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.
Step Three: Use an Up-To-Date Foreign Housing Exclusion Calculator
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 was $103,900 in 2018; in 2019, it is $105,900. 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 2019, the numbers are below:
($105,900 multiplied by 0.3) $31,770 – ($105,900 multiplied by 0.16) $16,944 = $14,826 (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.
Questions About the Foreign Housing Exclusion Calculator?
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