10 Essential things you need to know about claiming the Foreign Housing Exclusion or Deduction on Form 2555
In addition to your Foreign Earned Income Exclusion claim, you may also claim an exclusion or a deduction of eligible foreign housing expenses incurred during the tax year.
This can increase your Foreign Earned Income Exclusion claim, which will further reduce your foreign gross income. The housing exclusion is particularly helpful for US expats living in foreign countries with a high cost of living.
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To claim the Foreign Housing Exclusion or deduction, you must already qualify for and claim the Foreign Earned Income Exclusion
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Employees may claim the foreign housing exclusion out of their employee earnings, whereas the foreign housing deduction, calculated separately, only applies to foreign housing expenses paid for with self-employment earnings.
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Foreign housing expenses include 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. Also only consider foreign housing expenses for the part of the year that you qualify for the foreign earned income exclusion.
The last big audit report on the Foreign Earned Income Exclusion and Foreign Housing Expenses claimed was completed in 2013 by TIGTA (the audit arm of the IRS) it found:
Of approximately 140 million Tax Year 2009 individual income tax returns filed during Processing Years 2010 and 2011, 372,119 (0.27 percent) tax returns included a Form 2555/2555-EZ. The exclusions, credits, and deductions claimed were as follows:
- $23.3 billion in the FEIE.
- $5 billion in Foreign Tax Credits.
- $2.7 billion in Foreign Housing Exclusions.
- $102.6 million in Foreign Housing Deductions.
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Housing expenses do not include expenses that are lavish or extravagant under the circumstances, e.g. domestic labor, 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.
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You also can’t include in housing expenses the value of meals, nor can you include the value of employer-provided lodging that’s not included in your gross income.
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Your foreign housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location in which you incur housing expenses. In 2020 the limit on housing expenses is detailed in a table of locations in the Instructions for Form 2555. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year, so typically where income has already been excluded in full by the foreign earned income exclusion there isn’t much point in electing to claim foreign housing exclusion or deduction …..
Did you know that in 2020 Hong Kong has the highest limit on foreign housing expenses deduction at $114,300 followed by Moscow at $108,000? Down there amongst the lowest housing expense limits detailed on the table is Valencia, Spain at $32,400. No wonder Valencia was ranked by InterNations as 2020’s best city for expats!
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Your foreign housing deduction cannot be more than your foreign earned income less the total of (1) your foreign earned income exclusion, plus (2) your housing exclusion, if any. NB You would not have both a foreign housing deduction and a foreign housing exclusion unless during the tax year you were both self-employed and an employee.
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Similar to the Foreign earned income exclusion, once you choose to exclude foreign housing amounts, you can’t take a foreign tax credit or deduction for taxes on the income you already excluded (see my blog on How claiming the Foreign Earned Income Exclusion could impact on other areas in your tax return) and once you choose to exclude your foreign earned income and/or your foreign housing costs, that choice remains in effect for that year and all later years unless you revoke it.
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Your foreign housing amount is the total of your foreign housing expenses for the year minus the base housing amount. The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. For the maths geeks out there, the amount is calculated as 16% of the maximum exclusion amount divided by 365 (366 if a leap year), then multiplied by the number of days in your qualifying period that fall within your tax year.
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Some examples of foreign housing expenses that may be claimed include rent, utilities (other than telephone), real and personal property insurance, non refundable fees paid to obtain a lease, rental of furniture and appliances, residential parking and household repairs incurred by you and not your landlord.
Still not sure? Please get in touch.