How the Foreign Housing Allowance Can Reduce Your US Expat Taxes
As a US expatriate living abroad and filing your US expat taxes, you must make sure that you take full advantage of Form 2555, the Foreign Earned Income Exclusion Form, which not only helps you calculate the income that you may exclude from your taxes but also allows you to exclude basic living expenses from your tax liability. For most expats, the Foreign Housing Allowance makes it possible to exclude up to 30% of the amount they claim for their Foreign Earned Income Exclusion for housing-related expenses, such as rent, utilities (except telephone bills), parking, and property insurance.
This short video explains the basics about the Foreign Housing Exclusion and how it can help reduce the amount of taxes you owe while living overseas.
What is the Foreign Housing Exclusion?
Foreign Housing Allowance
A mechanism the IRS has in place that allows qualified expatriates to exclude expenses related to living overseas. These expenses include the following:
- Furniture rental
- Personal property insurance
- Leasing fees
- Utilities (excluding telephone bills)
Some expenses not included in this allowance:
- Mortgage payments
- Television subscriptions
- Domestic labor
- Purchased furniture
How do I qualify for the Foreign Housing Exclusion?
- The Physical Presence Test – Requires that expatriates be physically present in a foreign country for 330 full days. This does not include transit to or from the United States – you must have been physically present inside the country for all 24 hours of a day for it to count towards the Physical Presence Test.
- Bona Fide Resident Test – Requires that expatriates be a bona fide resident of a foreign country, have lived there for at least one full year, and have no intention of leaving that country permanently.
Is there a limit to the Foreign Housing Exclusion?
Expatriates are allowed to exclude up to 30% of the income they excluded with the Foreign Earned Income Exclusion. For the 2019 tax year, the Foreign Earned Income Exclusion was capped at $105,900. So if you excluded $105,900 of your foreign earned income, you can exclude 30% of that for the Foreign Housing Exclusion:
$105,900 X .30 = $31,770
For the 2013 tax year, the Foreign Earned Income Exclusion is capped at $107,600. So if you excluded $107,600 of your foreign earned income, you can exclude 30% of that for the Foreign Housing Exclusion:
$107,600 X .30 = $32,280
However, if you only earned $50,000 and thus only excluded $50,000 of your Foreign Earned Income Exclusion, your Foreign Housing Exclusion would be capped at:
$50,000 X .30 = $15,000
Are there exceptions?
If you live in a city with a higher cost of living, you may be eligible to exclude more of your Foreign Housing Expenses. These cities include London and Hong Kong, among others.
Don’t worry! Greenback can help you:
- Learn more by reading Expatriate Tax Return Savings Tips on our website.
- File amended tax returns and forms accurately and in a timely manner.
- Help you find the best ways to reduce or eliminate the taxes you owe by completing your US expat taxes for the current year.
How do I apply this to my US expat taxes?
Expats can apply the Foreign Housing Exclusion to their US expat taxes return via Form 2555. This is the same form you can use to exclude your income with the Foreign Earned Income Exclusion. If you are not sure how much you can exclude, if you live in an area with a higher housing allowance, or if you want to learn how to apply the Foreign Housing Exclusion to your expat tax return, please contact us.
Originally published on June 4, 2012. Updated on March 2020.