Foreign Housing Exclusion: A Guide for US Expats

Jun 27, 2024

Living abroad as a U.S. expat comes with unique financial benefits, one of which is the Foreign Housing Exclusion. This exclusion helps reduce your tax liability by allowing you to exclude certain housing costs from your total foreign earned income. Understanding the base housing amount, maximum foreign earned income, and reasonable expenses will help you maximize your tax savings. This guide will provide a clear and concise overview of how to claim these benefits effectively.

What is the Foreign Housing Exclusion?

The foreign housing exclusion allows you to exclude a portion of your foreign housing expenses from your taxable income, up to a maximum amount that varies by location. These foreign housing costs are part of the exclusion and can help offset certain living expenses incurred from moving abroad. To claim the exclusion, you must file Form 2555 with your tax return.

The foreign housing exclusion only applies to amounts considered paid for with employer-provided funds, which includes any amounts paid to you or incurred on your behalf that are taxable foreign earned income for that year.

How do you qualify for Foreign Housing Exclusion?

To qualify for the foreign housing exclusion, you must first qualify for the foreign earned income exclusion (FEIE) by passing either the bona fide residence test or the physical presence test.

The bona fide residence test is passed by being a resident of a foreign country for an uninterrupted calendar year (January 1st to December 31st). The physical presence test is passed by being physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

In addition to qualifying for the FEIE, your housing expenses must exceed 16% of the FEIE amount for the given tax year in order to use the foreign housing exclusion. For the 2023 tax year, the FEIE is $120,000, so the base housing amount is 16% of this figure, which is $19,200.

The foreign housing exclusion only applies to amounts considered paid for with employer-provided funds, which includes any amounts paid to you or incurred on your behalf that are taxable foreign earned income for that year. If you are self-employed, you may qualify for the foreign housing deduction instead, which applies to amounts paid with self-employment earnings

What is the Foreign Housing Exclusion For 2024?

For the 2024 tax year, the maximum foreign housing exclusion is $37,950. This amount is calculated as 30% of the Foreign Earned Income Exclusion (FEIE), which is set at $126,500 for 2024.

What Counts as Housing Expenses?

Qualified housing expenses include:

  • Rent
  • Utilities (except telephone charges)
  • Property insurance
  • Fees for securing a lease
  • Rental of furniture
  • Repairs and residential parking

What Doesn’t Count?

You cannot include:

  • Lavish or extravagant expenses
  • Mortgage interest or property taxes
  • The cost of buying property
  • Domestic labor (maids, gardeners)
  • Improvements that increase property value

How to Calculate the Foreign Housing Exclusion?

To determine your housing exclusion, follow these steps:

  1. Total Housing Expenses: Add up all your eligible housing costs for the year. These qualified housing expenses are those that are reasonable and necessary for living abroad. Include costs such as rent, utilities, property insurance, and repairs. Remember, only the portion of these expenses incurred while living in a foreign country is eligible.
  2. Subtract the Base Housing Amount: This base housing amount is set at 16% of the maximum foreign earned income exclusion (FEIE). For 2023, the FEIE is $120,000, making the base housing amount $19,200 annually or $56.60 per day. The base housing amount represents a standard threshold of housing expenses that the IRS assumes any taxpayer will incur.
  3. Apply the General Limitation: The qualified housing expenses eligible for the exclusion are generally limited to 30% of the maximum FEIE, which is $36,000 for 2023 ($98.63 per day). However, if you live in a high-cost locality, you may be able to claim more.

Example Calculation: Suppose your total housing expenses for the year are $30,000. First, you subtract the base housing amount of $19,200, resulting in a housing amount of $10,800. If you live in a high-cost locality, you might be able to exclude more than the standard $36,000 per year. For example, living in cities like Tokyo or London allows for higher exclusions due to increased living costs. These limits are detailed here.

How to Claim the Foreign Housing Exclusion?

To claim the Foreign Housing Exclusion, file Form 2555 with your U.S. tax return, detailing your income, housing expenses, and residency status. It’s crucial to claim the housing exclusion before the foreign earned income exclusion on the same form. This ensures you maximize your tax benefits effectively.

Special Considerations

Married couples can maximize benefits if both spouses qualify, as each can claim the exclusion, potentially doubling the benefit. For self-employed individuals, the exclusion operates differently, often as a housing deduction instead. The housing deduction applies to self-employment earnings and allows you to deduct housing costs from your gross income. Additionally, any unused housing deductions can be carried over to the next year, but only once, helping to manage your tax liability over multiple years.

Important Notes

  1. Double Benefits Not Allowed: You cannot include expenses for housing that you already excluded from gross income, such as tax-free employer-provided lodging. This prevents double-dipping into multiple tax benefits for the same expense.
  2. Foreign Tax Credit or Deduction: Once you choose to exclude foreign housing amounts, you cannot take a foreign tax credit or deduction for taxes on the income you exclude. This is to ensure that taxpayers do not receive multiple tax benefits for the same income.
  3. Additional Child Tax Credit: If you claim the foreign earned income exclusion or foreign housing exclusion, you may lose eligibility for the additional child tax credit if you do not have earned income reported.

The Foreign Housing Exclusion is a powerful tool for U.S. expats to reduce their taxable income. By understanding the qualifying criteria and how to calculate your housing expenses, you can maximize your tax savings. This exclusion, along with the Foreign Earned Income Exclusion, helps reduce the tax burden on income earned abroad, making living overseas more financially viable.

At 1040 Abroad, we offer free tax advice via email, provided by our team of Enrolled Agents. Whether you have questions about the foreign housing deduction, managing your tax liability, or specifics about your foreign earned income, we’re here to help. Contact us today to get your questions answered and ensure you’re maximizing your tax benefits while living abroad.

Written by

Kasia Strzelczyk, EA

A certified accountant and IRS enrolled agent with over 8 years of experience working with US expats. With a deep understanding of the unique financial challenges faced by expats, Kasia is dedicated to helping clients navigate complex tax laws and regulations.

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