The Foreign Housing Exclusion, sometimes referred to as the Foreign Housing Allowance or Foreign Housing Deduction, is a lesser-known money saver that can help limit expats’ tax liability. With appropriate preparation and a little foresight, this exclusion can increase the affordability of living overseas. And better yet, if you’re planning on using the Foreign Earned Income Exclusion (FEIE) as well, this deduction requires no extra paperwork. Find out what expats need to know in order to save money with the Foreign Housing Exclusion.
What Is the Foreign Housing Exclusion Exactly?
The Foreign Housing Exclusion decreases an expat’s tax liability by allowing certain housing expenses to be deducted from taxable income. It was created by the IRS to offset the expenses that go hand-in-hand with living overseas.
How Do I Qualify for the Foreign HousingExclusion?
The first step to qualifying for the Foreign Housing Exclusion is by qualifying for the FEIE. In order to be eligible for the FEIE, you need to pass either the physical presence test or the bona fide resident test.
- The bona fide residence test is passed by being in your country of residence for an uninterrupted calendar year.
- The physical presence test is passed by being physically present for 330 full days (each day defined as 24 consecutive hours) during 12 consecutive months. The 330 days do not have to be consecutive, which means those who are new to the expat lifestyle or those who moved midyear can pass this test more easily.
In addition, your housing costs must have been greater than 16% of the FEIE amount for the given tax year in order to use the Foreign Housing Exclusion.
How Much Is the Foreign Housing Exclusion?
The Foreign Housing Exclusion amount is equal to your total foreign housing expenses for the year (up to 30% of the FEIE) minus the base housing amount (which is equal to 16% of the FEIE).
This means that the maximum amount you can exclude for the Foreign Housing Exclusion is equal to 14% of the Foreign Earned Income Exclusion. For the 2020 tax year, this amount is $15,064. For the 2021 tax year, the maximum housing exclusion is $15,218.
How to Calculate your Foreign Housing Deduction
To calculate your Foreign Housing Exclusion (or Deduction), first, tally up your qualifying expenses.
Keep in mind that, in order to use the exclusion, your qualifying housing costs must exceed 16% of the FEIE amount for the specific tax year ($17,216 for 2020; $17,392 in 2021). This amount is considered the base housing cost for living in the United States.
So long as your qualifying expenses exceed the base housing cost, you can exclude (or deduct) the total of your qualifying expenses up to the maximum amount allowed for the tax year ($15,064 for 2020; $15218 for 2021).
If you live in a city that is identified by the IRS as “ultra-high cost,” you may be able to use an additional amount for the foreign housing exclusion. The current list is included in the IRS’ instructions for completing Form 2555, starting on page seven. Each city has a different amount, so be sure to look up your location!
What Are Qualified Housing Expenses?
Rent and utilities are qualified expenses, as are parking, household repairs, real and personal property insurance, and furniture and accessory rentals. Please note that purchases of furniture or other housing expenses will not qualify for the Foreign Housing Deduction, nor will mortgage payments or domestic labor.
|Qualified Housing Expenses||Non-Qualifying Housing Expenses|
|utilities (except for telephone, TV services, and internet)||domestic labor (maids, housekeepers, etc.)|
|personal property insurance (such as homeowner’s or renter’s insurance)||purchased furniture|
|leasing fees||anything deemed “lavish or extravagant”|
How to Claim the Foreign Housing Exclusion
Once you’ve determined that you qualify for the FEIE, you need to elect it via Form 2555. (Keep in mind, if you are going to use the Foreign Housing Exclusion, you must submit the regular Form 2555 and not Form 2555-EZ.)
If you are self-employed, you will use the Foreign Housing Deduction. As the name implies, this version of the tax benefit works as a deduction rather than an exclusion. This means that you would not combine your housing expenses with your Foreign Earned Income Exclusion. Instead, you would report your housing expenses on your Form 1040 (on line 36, in the adjustments category, to be specific).
Lastly, if you’re married and filing jointly, you will be able to claim the Foreign Housing Exclusion once, so sometimes it’s helpful to consult the experts to ensure you save as much money as possible.
Greenback Accountants Can Guide You Through Every Applicable Deduction and Exclusion
If you want to be sure you don’t miss out on any money-saving exclusions that are available to you, get started with Greenback today, and find out why expats all over the world consistently choose Greenback for simple, accurate, expat tax prep.