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Expat Tax Essentials
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. Learn what expats need to know to save money with the Foreign Housing Exclusion.
The Foreign Housing Exclusion decreases an expat’s tax liability by allowing certain housing expenses to be deducted from taxable income. The IRS created it to offset the expenses that go hand-in-hand with living overseas.
Generally, the foreign housing exclusion can be used for any expenses related to housing that are not paid using a US-based employer. This includes rent, utilities, and repairs. It is not available for home maintenance costs that are covered by an employer or household member (e.g., if your landlord pays for repairs).
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.
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.
The Foreign Housing deduction 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 2022 tax year (filed in 2023), the maximum standard housing exclusion is $15,680, and for the 2023 tax year (filed in 2024), the maximum standard exclusion will be $16,800.
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 ($17,920 in 2022). 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 ($15,680 for 2022).
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!
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.
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 FEIE. 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 can claim the Foreign Housing Exclusion once, so sometimes it’s helpful to consult the experts to ensure you save as much money as possible.
If you want to be sure you don’t miss out on any money-saving exclusions available to you, get started with Greenback today, and find out why expats worldwide consistently choose Greenback for simple, accurate, expat tax prep – including foreign housing exclusions. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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