Foreign Housing Exclusion for Americans Abroad

By ZM Ishmurzina

What is Foreign Housing Exclusion or Deduction? If you are a U.S. citizen or a green card holder, you are taxed on your worldwide income. However, you may be able to minimize your US tax liability by utilizing certain provisions under Internal Revenue Code section 911.

 

Foreign Housing Exclusion or Deduction will minimize US expat tax liability.

Does any American expat qualify for the foreign housing exclusion?

An American living abroad should meet several requirements to qualify for the foreign housing exclusion.

  • American expat must have foreign earned income.
  • American living abroad must have a tax home in a foreign country
  • American expat must meet either a physical presence test or bona fide residence test.
  • American living overseas paid housing expenses.

Which housing expenses are eligible for foreign housing exclusion?

  • Rent
  • Fair rental value of housing provided in kind by your employer
  • Utilities (other than telephone charges)
  • Real and personal property insurance (renter’s insurance)
  • Rental of furniture and accessories
  • Repairs
  • Residential parking

Which housing expenses are NOT eligible for the foreign housing exclusion?

  • Lavish or extravagant
  • Deductible interest or taxes (for example, mortgage interest or real estate taxes)
  • Expenses for buying property (closing costs)
  • Principle payments on a mortgage
  • Domestic labor (maids, gardeners, etc.)
  • Purchased furniture
  • Improvements and other expenses that increase the value or appreciably prolong the life of property.

How much is the maximum amount of the foreign housing exclusion?

The important thing to remember is that the only housing expenses eligible for the foreign housing exclusion are the expenses paid with employer-provided amounts. For example, wages, salaries, tax equalization payments by your employer etc. The total housing amount that can be excluded is the amount in excess of a base housing amount. The base housing amount is 16% of the total foreign earned income exclusion.

Also, the foreign housing exclusion cannot exceed your foreign earned income.

If you are a self-employed American living overseas, you cannot take the foreign housing exclusion. However, you can claim the foreign housing deduction.

The foreign housing exclusion can help you decrease US income tax liability, however, it doesn’t minimize your self-employment tax.

If your need help with filing a US tax return as an American expat, please seek the help of an expat CPA that provides international tax services.