Expats Should Not Ignore the Foreign Housing Exclusion
While the foreign tax credit (FTC) and foreign earned income exclusion (FEIE) usually steal the spotlight as the two main methods used by expats to reduce or eliminate their U.S. taxes, a third and sometimes overlooked method may be available if all else fails.
The Foreign Housing Exclusion
In addition to the FTC and FEIE, U.S. expats can also exclude or deduct from their gross income their housing cost amount in a foreign country provided they qualify under the bona fide residence or physical presence tests.
The housing exclusion applies to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year. A housing deduction, instead of an exclusion, applies to amounts paid for with self-employment earnings. Although the foreign housing exclusion and/or the deduction will reduce your regular income tax, they will not reduce your self-employment tax.
In order to claim the foreign house exclusion/deduction, an individual must file Form 2555.
Limitations on the Exclusion
Housing costs include your reasonable expenses actually paid or incurred for housing in a foreign country for you and (if they lived with you) for your spouse and dependents. They do not include expenses that are lavish or extravagant under the circumstances, the cost of buying property, purchased furniture or accessories, and improvements and other expenses that increase the value or appreciably prolong the life of your property.
The housing cost amount is also subject to certain limitations that are adjusted based on geographical location. Without any adjustments to the limitations, the maximum foreign housing exclusion for the 2015 tax year is $14,112 (and for the 2016 tax year it rises to $14,182). Adjustments vary from city to city and are based on the cost of living in each city. The IRS publishes an updated table with the relevant limitations each year. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year.
At Expat Tax Professionals, our experts have extensive experience in utilizing all of the tax benefits available to U.S. expats, including the FEIE, FTC, foreign housing exclusion, treaty benefits, and more. We have helped many expats significantly reduce or eliminate their U.S. tax obligations using one or more of these benefits. We are ready to help you with your U.S. tax filings. Contact us today!
By Ephraim Moss, Esq. & Joshua Ashman, CPA