The Foreign Housing Exclusion for US Expats

October 16, 2023 | , | 4 minute read
Expat Tax Blog. Tax Tips for US Americans abroad.

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foreign housing exclusion for us expats

Home is where the heart is. Whether that’s in the US or a foreign city off the coast of Spain. If you’re an American expat, you have to redefine home while living abroad. We already know that leaving your home in the states to create a new life is not easy. But, American expats do have the opportunity to reduce US taxes by deducting the money spent on a home abroad. The Foreign Housing Exclusion is an expat tax benefit that helps deduct excess housing expenses from your US taxable income!

What is the Foreign Housing Exclusion?

As an expat from the United States and still subject to worldwide taxation and filing US taxes, you probably already know about the number one expat tax benefit, the Foreign Earned Income Exclusion. Your earned income, below the maximum exclusion $120,000, you can be completely exempt from US taxation.

What if you earn more than that amount though? Can you score any other expat tax benefits to shield your additional income from US taxes?

However, there’s no need to worry just yet about your passport being denied as a US expat! Ending up in James’s situation typically involves willingly refusing to file taxes as a US expat abroad or ignoring IRS notices regarding tax penalties and levies on your foreign assets. It’s important to note that James’s passport or application would NOT be at risk if he is bankrupt, a victim of tax-related identity theft, or has a pending offer in compromise with the IRS, for example.

So, this housing exclusion can help, especially if you earn more than the maximum FEIE allowed amount. The foreign tax credit can also be a huge help, which is also supported by MyExpatTaxes’ tax software.

Which foreign housing expenses can be deducted?

In addition to rent as a qualified expense for the Foreign Housing Exclusion, the following are also applicable:

  • home utilities (think electricity),
  • personal property insurance,
  • accessory rentals,
  • and household repairs.

Unfortunately, that couch you bought on Facebook Marketplace will not help you qualify for the Foreign Housing Exclusion. As well as having a cleaning person (domestic labor), and mortgage payments.

Filing out Form 2555 to claim the Foreign Housing Exclusion

You will need to attach Form 2555 to your federal income tax return to claim the exclusion. This form will minimize and counteract expenses that go towards living overseas. While it can be a bit complex, with our guide and some TLC, you can reduce your US taxes.

Qualifying for FEIE

To make sure that you as a US expat are qualified for the Foreign Housing Exclusion, you need to first be qualified for the FEIE.

How do you qualify for the foreign earned income exclusion? You may ask. We listed out 2 points for you to consider:

  1. Pass the Physical Presence Test or the Bona Fide Resident Test
    1. To pass the Physical Presence Test, you will need to be outside of the US for 330 full days in a consecutive 12 month period, that begins or ends in the tax year.
    2. To pass the Bona Fide Rest Test, you will need to be a resident in a foreign country and be subject to local income taxes for at least a full tax year.
  2. Once you are certain you qualify for the FEIE, you complete Form 2555 informing the IRS of which test you qualify under. Then comes the math!

Calculate your foreign housing exclusion

  • Gather up your receipts and calculate how much qualified foreign housing expenses you have for the tax year
  • Multiply the maximum income exclusion for the tax year you are applying for by 30% to calculate the limit on your qualified foreign housing expenses

However, what if you’re living in a city, such as London, where the apartment prices are through the roof? No need to fret because the IRS will allow you an increased housing exclusion limit. For US citizens living abroad in a high-cost city, make sure to check out page 7 in the IRS’ Form 2555 form here.

Now you know what the maximum amount you can exclude from with your housing costs and can complete the Foreign Housing Exclusion section of the form.

Keep in mind, that if you are an American abroad who is filing jointly, you can claim the Foreign Housing Exclusion only once. If you forget or don’t know about this, no worries, as we at MyExpatTaxes can help you see how much money you can save.

No Employer-Provided Amounts, use the Foreign Housing Deduction Instead

If you are a self-employed US expat, the Foreign Housing Exclusion will become a deduction for you, instead of exclusion. Therefore, you will need to complete Part IX of Form 2555 as well.

The Foreign Housing Deduction is an added expat tax benefit to ensure that those who earn more in addition to any employer-provided amounts, can still deduct the maximum of allowable foreign housing expenses from their US income tax return. However, you will need to instead subtract the Foreign Housing Deduction on line 36 of Schedule 1.

Employment income includes:

  • Wages and salaries paid as an employee
  • The fair market value of compensation provided (i.e. the fair rental value of provided lodging that is not excluded)
  • Rent paid by your employer directly
  • Amounts paid by your employer to reimburse you for relocation and tax equalization plans

MyExpatTaxes Can Help You Save Money with Every Exclusion

To be able to maximize your savings, we can help you with the Foreign Housing Exclusion through our app on Expats from almost 100 countries have been using our software, and they have nothing but good things to say about it. Our team makes sure US expats get the best kind of tax service for an affordable price, within an efficient amount of time.

So let us help you with the Foreign Housing Exclusion form so you can save money, buy that boat (or whatever luxury purchase you’ve had your eyes on), and carry on with your life.

Written by Michelle H.

October 16, 2023 | , | 4 minute read

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