US Expats and the Foreign Housing Exclusion
Aside from the foreign earned income exclusion, many U.S. expat taxpayers are also eligible for the foreign housing exclusion. This exclusion is a great way to lower your U.S. tax payment.
The foreign housing exclusion is a reduction in your income in combination with the foreign earned income exclusion. IRS created this exclusion to offset the cost of living outside of the United States.
The Foreign Earned Income Exclusion (FEIE) for 2015 taxes was $100,800. IRS determined a threshold of 16% of this amount to cover housing cost in the United States. This threshold amount that can be deducted from your tax liabilities is $16,128. The total housing exclusion amount varies depending on where you live outside the United States.
What are the requirements to avail of this exclusion?
Your eligibility depends on the amount of your expenses and in what country you live in. For you to qualify for the housing exclusion, you must meet and claim for the foreign earned income exclusion. To qualify, you must be outside the U.S. for 330 days within a 365-day window. You can also claim this exclusion by being a bona fide resident of a foreign country.
Once you qualify for the foreign earned income exclusion, you must claim this benefit on your tax return. Only then can you claim for the added housing exclusion.
You must also have qualified foreign housing expenses like rent, utilities, personal property insurance, leasing fees, parking rentals, furniture rentals, and repairs. The following expenses cannot be used for the housing exclusion: mortgage payments, domestic labor, furniture purchase, or other expenses that are lavish or extravagant.
The money you used to pay these housing expenses must be from employer-provided funds. The employer-provided funds are any amount paid to you by an employer and are included in your gross income. If your employer pays your housing funds and the amount is not included in your gross income, you cannot use those expenses to calculate the possible deduction.
What is the amount of the exclusion?
The foreign housing exclusion varies substantially to where you are in the world. For instance, US expats living in Dubai would get an exclusion of $57,174. Those living in Qatar would get $36,264.
To get the total expenses, you will assess all the payments you made on utilities, maintenance, and others related to your property. If your expenses are more than the amount allocated in your country, you will only get the maximum amount, for instance, $57,174 when you are in Dubai. There might be instances when your total expenses are lower than that amount, let’s say only $30,000 since you are living in less expensive areas. That $30,000 will be the amount you will work within your housing exclusion. Remember that your foreign housing exclusion cannot exceed your total foreign earned income.
How can the amount be calculated?
To calculate the amount that you are eligible, here is an example. If you live in Dubai, the U.S. government determines that the housing in Dubai for a year (e.g. 2015) would cost $57,174. Since living in Dubai is deemed more expensive than living in the U.S., you can claim the $41,046 difference.
Let’s say you spent below the maximum allowance in Dubai. If you spent $30,000 on your total housing cost in Dubai, you can claim $13,872. This amount is the difference between your total expenses and the threshold amount ($30,000 – $16,128).
What if you spent above the maximum allowance and you are living in Abu Dhabi where the maximum exclusion is $49,687? If you spent more than this amount, for example, your total housing cost was $52,000, you can claim $33,559. This is the difference between the maximum exclusion and the threshold amount ($49,687 – $16,128).
What if you are self-employed?
If you are self-employed you will need to calculate your housing expenses differently. Your housing expenses will not be considered as an exclusion. Although you will include the amount in Form 2555, it will not be added to your foreign earned income exclusion (Form 1040). Instead, it will be placed on line 36 in the adjustments section.
The amount will not reduce any self-employment tax due from your self-employment income. But if you are employed in a foreign country that has a social security totalization agreement with the United States, you will not be liable for Social Security taxes. You will have to enter a statement on your tax return that you are implementing a social security totalization agreement.
How will married couples claim for the housing exclusion?
Couples living together must calculate their housing expenses jointly. If they file the tax return jointly, either spouse, but not both, can claim the foreign housing exclusion.
If married couples live separately, they can claim separate housing exclusion if they are not within a reasonable commuting distance from each other’s residence.
What is the required form for the foreign housing exclusion?
Form 2555, part 6, 8, and 9 are the required forms for the foreign housing exclusion. You can optimize your taxes by preparing these forms well.