American expats living abroad can minimize US expat liability by claiming the foreign earned income exclusion. Additionally, Americans residing overseas can deduct foreign housing expenses if they meet the requirements. Foreign housing exclusion is adjusted for inflation annually. Moreover, the amount of foreign housing exclusion or deduction varies per each country. For example, it is much more expensive to live in Moscow than Bangkok. Consequently, the maximum amount of housing exclusion in 2013 for Moscow is $108,000 vs $59,000 in Thailand.
We often get questions from Americans moving abroad about the housing exclusion. The purpose of this article is to provide an overview of the most popular questions.
Foreign Housing Exclusion Basics
Can an American living abroad deduct or exclude foreign housing expenses?
Per Internal Revenue Code 911 Americans living overseas can utilize the foreign earned income exclusion and housing exclusion to avoid double taxation. However, these exclusions are not granted automatically. American expats must file a US expat tax return and comply with other US tax requirements.
How can American expats qualify for the foreign housing exclusion?
Americans living abroad must meet several requirements to claim the housing exclusion and to deduct foreign housing expenses.
1. US citizens or green card holders must have foreign earned income.
2. American expats must have a tax home in a foreign country.
3. US taxpayers must meet either the physical presence test or bona fide residence test.
4. Housing expenses must be paid with employer-provided amounts.
Which foreign housing expenses can be excluded or deducted?
Housing expenses must be reasonable expenses. These expenses must be paid in a foreign country. Additionally, foreign housing costs must be claimed for the same period that a taxpayer qualifies for the foreign earned income exclusion.
The following housing expenses are included:
- Fair rental value of housing provided by employer
- Utilities (phone charges are excluded)
- Occupancy taxes
- Fees for securing a leasehold
- Rental of furniture
- Residential parking
Eligible housing expenses do not include:
- Expenses that are lavish or extravagant in nature
- Deductible interest and taxes
- Closing costs to buy a property
- Principal payments on a mortgage
- Domestic labor like maids, gardeners, etc.
- Television subscriptions like HBO
- Improvements that increase the value of property
- Purchased furniture
How much is the maximum amount of foreign housing exclusion?
The amount of qualified housing expenses is limited, however, it varies per a country. As a general rule, the housing exclusion is limited to 30% of the maximum foreign earned income exclusion.
1. For example, the foreign income exclusion is $97,600 in a tax year 2013.
2. Consequently, the standard limit on housing expenses is $29,280 per year.
3. However, Americans living overseas can exclude only the foreign housing expenses that exceed the base amount. The base amount is 16% of foreign income exclusion or $15,616 in a tax year 2013. This base amount cannot be excluded.
4. In this scenario the actual amount of deductible foreign housing costs will be $13,664.
However, Americans residing in countries with a high cost of living can take a higher exclusion for foreign housing expenses. For example, an American living in Geneva, Switzerland can take an advantage of a higher housing limit ($98,300 in a tax year 2013).
Can Americans living abroad exclude more than the foreign earned income?
The total amount of foreign earned income exclusion and housing exclusion cannot exceed the foreign earned income. For example, an American working abroad earned $105,000 in Dubai in 2013. If he meets all requirements, then he can exclude from his income $97,600 under the foreign earned income exclusion and $7,400 under the foreign housing exclusion.
What is a difference between foreign housing exclusion and foreign housing deduction?
Self-employed taxpayers can claim the foreign housing deduction. While employees with employer-provided amounts qualify for housing exclusion.
Americans moving abroad are advised to follow US expat tax rules so they can qualify for the foreign earned income exclusion and foreign housing exclusion. Foreign housing expenses include a wide range of housing costs. It is essential to keep a record of these expenses in case of the IRS inquiry. Americans living abroad with additional questions about claiming foreign exclusions must consult an expat tax experts. Expat CPAs at Expattaxcpaservices.com provide tax preparation and advisory services.