Foreign Housing Exclusion or Deduction

 

In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your foreign housing amount if your tax home is in a foreign country and you qualify under either the bona fide residence test or the physical presence test.

The foreign housing exclusion applies only 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 (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.

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. The amount is 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.

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. Consider only housing expenses for the part of the year that you qualify for the foreign earned income exclusion.

Housing expenses 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.

You also cannot include in housing expenses the value of meals, nor can you include the value of employer-provided lodging not included in your gross income.

Your housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location in which you incur housing expenses. The limit on housing expenses is computed using the worksheet on page 3 of the Instructions for Form 2555. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year. 

If you choose the foreign housing exclusion, you must figure it before figuring your foreign earned income exclusion and cannot claim less than the full amount of housing exclusion to which you are entitled. Once you choose to exclude foreign housing amounts, you can’t take a foreign tax credit or deduction for taxes on income you can exclude. If you do take a credit or deduction for any of those taxes, your choice to exclude housing amounts may be considered revoked. See Publication 514, Foreign Tax Credit for Individuals (PDF), for more information.

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. 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.

Although the foreign housing exclusion and/or deduction will reduce your regular income tax, they will not reduce your self-employment tax.

The foreign housing exclusion or deduction is computed in parts VI, VIII, and IX of Form 2555. Please refer to the Instructions for Form 2555 and chapter 4 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

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