There are several important deductions and exclusions that help US expats reduce their overall US tax liability. One of the lesser-known exclusions is the Foreign Housing Exclusion (FHE). Let’s take a closer look at how this exclusion is calculated and how it can help save you thousands of dollars!
What is the foreign housing exclusion?
The foreign housing exclusion allows you to deduct certain housing expenses from your US tax liability. In a nutshell, this is the IRS’ way of saying “Hey, we understand that it is often more expensive to live abroad than here in the US so here is how we can help!”
Who can use the foreign housing exclusion?
You can use the FHE if you qualify as an official US expat via one of two residency tests- the Physical Presence test or the Bona Fide Residence test. With the Physical Presence test, you must be physically present inside a foreign country for 330 of any 365-day period. With the Bona Fide Residence test, you must reside in a foreign country for at least one year and have no intentions of permanently returning to the US. These are the same qualifications for expats who want to use the Foreign Earned Income Exclusion, another money-saving exclusion for US taxpayers abroad.
Which housing expenses can be excluded?
Examples of qualifying housing expenses include:
- Utilities (excluding telephone bills and cable TV)
- Personal property insurance
- Leasing fees
- Furniture rental
Expenses that do not qualify include “lavish or extravagant” expenses, mortgage payments, the cost of domestic labor, television subscriptions and purchased furniture.
How do you calculate the foreign housing exclusion?
The maximum deductible FHE amount varies each year, as it is tied to the Foreign Earned Income Exclusion which adjusts each year for inflation ($105,900 for 2019 and $107,600 for 2020). Here is the calculation:
Housing expense limitation – Base Housing Cost = Maximum Housing Exclusion
The Base Housing Cost is the IRS’ calculation of what it would cost if you were living in the US, so there is a housing limitation which must be reduced by the base in order to determine what you can exclude.
For 2019, here are the actual numbers:
$31,700 ($105,900 x 30%) – $16,944 ($105,900 x 16%) = $14,756
So the maximum you can exclude in 2019 is $14,756.
Some cities have higher allowances
While there is a maximum exclusion each year, there are plenty of high-cost cities that qualify for an even higher exclusion amount! If you are living in a city with a high cost of living, you can exclude thousands more from your US taxes up to your wage total. Here are a few of these cities:
Hong Kong – $114,300
Milan, Italy – $71,500
Paris, France – $71,800
Oslo, Norway – $35,200
Moscow, Russia – $108,000
Geneva, Switzerland – $94,300
Example of how the FHE works
Brad Smith is an expatriate living in Shanghai, which has a maximum housing exclusion of $57,001. He has determined that he qualifies for the FEIE. His foreign income that is eligible for exclusion is $250,000. His qualifying days in 2019 are 350 days (i.e. he was inside a foreign country for 350 days in the tax year). His employer paid $75,000 in housing costs on his behalf and is included in that $250,000.
He calculates his Foreign Housing Cost Exclusion as follows:
Qualifying housing costs $75,000
Limit on costs: (Shanghai) $57,001 (as such, $75,000 is limited to the $57,001)
Less: Base Housing costs of $16,944
Available Housing Exclusion: $40,057
Note that Brad can only use this exclusion of $40,057 if he still has wages left over after excluding the $105,900 from the Foreign Earned Income Exclusion (which he does given his high income).
Need more information about reducing your US tax liability?
Download one of our free US expat tax guides that provide an in-depth look at your US taxes.