The Foreign Housing Exclusion is a money-saving provision that can help Americans living abroad reduce their tax liability. Plus, it is closely tied to the Foreign Earned Income Exclusion. Find out the basics in the guide for expats below.
What is the Foreign Housing Exclusion?
The Foreign Housing Exclusion is available to US expats (which includes US citizens and resident aliens) to reduce taxable foreign earned income. This exclusion can only be used in addition to the Foreign Earned Income Exclusion – meaning you must qualify for the FEIE first. The Foreign Earned Income Exclusion is available to Americans living abroad with foreign earned income if they meet the requirements for the bona fide residence test or the physical presence test.
The bona fide residence test stipulates that you must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. The physical presence test specifies that you have physically been in a foreign country or countries for 330 or more full days during a 12-month period. Meeting requirements for one of these tests is how you use the Foreign Earned Income Exclusion.
Which Expenses Does the Foreign Housing Exclusion Cover for Americans Living Abroad?
The Foreign Housing Exclusion applies to amounts paid for housing expenses with employer-provided funds, which includes amounts paid directly to you or on your behalf by your employer for housing expenses. Housing expenses that are covered include rent, utilities, and other reasonable housing expenses. The exclusion unfortunately does not cover the cost of buying property, purchasing furniture, or making improvements to the property.
However, there is a limit to what it covers for Americans living abroad. The exclusion is generally limited to 30% of the maximum Foreign Earned Income Exclusion computed on a daily basis and cannot exceed the total foreign earned income for the tax year. And, the daily basis varies depending on location (your host country) and may change annually.
The Foreign Housing Exclusion can also be used to reduce regular income tax but will not reduce self-employment tax on self-employed income. Effectively, the Foreign Housing Exclusion applies only to employees. For self-employed expats, the deduction is called the Foreign Housing Deduction, which is similar to the housing exclusion.
Greenback Makes Tax Time for Americans Living Abroad Stress-Free
For more information or to find out if you qualify for the Foreign Earned Income Exclusion and the Foreign Housing Exclusion, get started with Greenback today.