There are several ways to save on your US expatriate taxes by lowering your gross income, one of the most common being with the Foreign Earned Income Exclusion (FEIE). Another method that you may not be aware of is the Foreign Housing Exclusion, which can help lower your income even more for a lesser US tax liability. Here’s what you should know about the Foreign Housing Exclusion and how you can use it to save.
The Foreign Housing Exclusion Explained
The way the Foreign Housing Exclusion works to help you save is by reducing your income when used in conjunction with the FEIE on your US expatriate taxes. You can use the Foreign Housing Exclusion to put housing expenses you’ve paid throughout the year toward your FEIE, increasing the exclusion and lowering your income. Since many foreign locations have a higher cost of living, the IRS created the Foreign Housing Exclusion to help offset the cost of living outside the US. You can learn more about the FEIE in our tax guide for Americans working overseas.
Requirements for Taking the Foreign Housing Exclusion
In order to use this exclusion to save on your expatriate tax, you will need to meet the following requirements:
1. Qualify for and Claim the FEIE
The FEIE reduces your foreign earned income, which lowers your taxable income on your US tax return. In order to use the FEIE, you must meet one of two conditions:
- Be outside the US for 330 days out of a 365-day window, or
- Be a bona fide resident of a foreign country
In order to use the Foreign Housing Exclusion, you must qualify for and claim the FEIE on your US expatriate taxes as well.
2. Have Qualified Foreign Housing Expenses
Expenses that are considered qualified include:
- Utilities (with the exception of TV services, telephone and Internet)
- Personal property insurance (homeowners or renters insurance)
- Leasing fees
- Furniture rental
- Parking rental
You can’t use mortgage payments, domestic labor (such as maids, housekeepers, etc.), purchased furniture or anything that is considered ‘lavish’ or ‘extravagant.’ Also, your Foreign Housing Exclusion can’t exceed your total foreign earned income for the tax year on your US expatriate taxes.
3. Use Employer-Provided Funds for Housing Expenses
Employer provided funds must be used to pay for your housing expenses. These are considered to be any amounts paid to you by your employer and are included in your gross income for the year. They can be designated as housing funds or part of your regular salary. If your employer pays for your housing expenses and you fail to include that in your gross income (amount used to calculate the FEIE), you will not be able to use the housing expenses to calculate a deduction on your US expatriate taxes.
4. Housing Expenses Exceed the Base Amount Specific to Your Location
Once you’ve surpassed a base amount with your housing expenses (which is determined by the IRS), you’ll be able to take the Foreign Housing Exclusion up to the maximum allowed by your location. The base amount is currently 16% of the FEIE, and the maximum amount is based on your location (or where the expenses were incurred). You can review the exclusions on the IRS website.
Using the Foreign Housing Exclusion
Once you’ve determined you qualify for the FEIE and the Foreign Housing Exclusion, you will use Form 2555 to calculate both. You must also figure out how much of your housing expenses you’ll be able to take on your US expatriate taxes by doing the following:
- Calculate your total qualified foreign housing expenses for the calendar year
- Figure out how much FEIE you will take on your expatriate taxes
- Multiply the FEIE by 16% to determine your base amount that you must exceed in order to claim the Foreign Housing Exclusion
- The amount of your qualified foreign housing expenses over the base amount will be compared to the limits set for your specific location (see page 6). You have the ability to take the larger of your expenses (over the base amount) or the location limit.
- The amount of Foreign Housing Exclusion allowed will be added to your FEIE amount and entered on Form 1040 for your US expatriate taxes.
Have More Questions About the Foreign Housing Exclusion?
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