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?
Created by the IRS to offset the expenses that go hand in hand with living overseas, the Foreign Housing Exclusion decreases an expat’s tax liability by allowing certain housing expenses to be deducted from taxable income. This exclusion can be used if your housing costs were over 16% of the FEIE amount for that year. It is calculated is by multiplying the maximum income exclusion for that tax year’s FEIE (in 2019, it is $105,900; in 2020, it is $107,600) by 0.3 to get 30% of the full exclusion; for 2019, the magic number is $31,770 ($32,280 for 2020). That is the maximum amount excludable when using the Foreign Housing Exclusion.
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!
How Do I Save Money With the Foreign Housing Exclusion?
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. Plus, 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.
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.
One last thing expats should remember: if you are self-employed, the Foreign Housing Deduction works as a deduction rather than an exclusion, meaning that you would not combine your expenses with your Foreign Earned Income Exclusion, but instead would report them 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.
Which Expenses Qualify?
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.
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.