US Income Taxes for Expats – Foreign Housing Exclusion or Deduction
Continuing my mini-series on filing your US income taxes while living and working overseas, this post will focus on how and when to use either the foreign housing exclusion or deduction.
Check out my other posts on this topic:
- Basics of US Income Taxes for Americans Living Overseas
- How to Use the US Foreign Earned Income Exclusion (FEIE)
Foreign housing exclusion vs. foreign housing deduction
There’s a very easy way to know whether you should use the exclusion or the deduction.
If you work for an employer and you pay for housing out of your salary or your employer gives you a housing allowance, then you can only use the foreign housing exclusion.
If you’re self-employed, then you use the foreign housing deduction.
If you do a little bit of both – traditional employer salary and self-employed income, then you can use both the exclusion and the deduction, but you calculate the housing exclusion first more below).
Calculating the foreign housing exclusion
First, you calculate the base housing amount which is equal to 16% of the foreign earned income exclusion, so in 2008, 16% of $87,600 is $14,016. If you are living in a foreign country for entire calendar year, you use $14,016 as your base housing amount. If you’re only there for part of the year, you multiply the $38.30/day rate by the number of full (24 hour) days you lived in the foreign country.
Next, you calculate your housing limit which is typically 30% of the foreign earned income exclusion. For 2008, the full year amount would be $26,280 or $71.80 per day if you’re only living abroad for part of a year. If you live in a high-cost locale, however, the limits can be much higher. For example the London housing limit is $82,900! A list of the 2008 housing limits can be found in the IRS form 2555 instructions.
Once you have the base housing amount and housing limit amount, you can figure your exclusion. Say your housing expenses were $2000/month or $24,000 for the year. The $24,000 is under the housing limit for a standard city, so you can use your full housing costs for the calculation. Subtract your housing costs ($24,000) from the base amount for 2008 full year ($14,016) and you have $9,984 of excludable housing expenses.
A huge drawback is that the foreign housing exclusion can only be used for rented housing. You cannot exclude the cost of paying off your mortgage or any interest payments that are deductible.
Interaction with the Foreign Earned Income Exclusion
Here is where this gets a little complicated. Once you’ve figured out your excludable housing amount, $9,984 in the above example, you subtract it from your foreign earned income. Continuing our example, if you earned $95,000 in foreign earned income - $9,984 would your foreign housing exclusion and $85,016 would be your foreign earned income exclusion.
The maximum amounts of income and housing that you could exclude at the 2008 rate would be ($87,600+($26,280-$14,016) ) $99,864 at a standard rate locale. For a high-cost city the excludable amounts could be much higher. For example, in London, you could exclude up to $156,484 ($87,600 + ($82,900-$14,016) for 2008. Bear in mind though, you would actually have to be spending the $82,900 on rent – that’s $6908 per month!
If your income is more than the maximum for your city, then you will owe US taxes on the amount over your exclusions.
Calculating the Foreign Housing Deduction
Remember, you can only use the foreign housing deduction if you have self-employment income. You use the same limits as described above for the foreign income exclusion. Your deduction amount cannot be more than your excluded foreign income.
If you are self-employed and have a regular job, you would calculate the exclusion amount first then deduct the remainder of your allowable expenses. All of this would be subject to the same limits as above. One last thing to note is that your housing deduction cannot be more than the housing exclusion.
Forms
To claim the foreign income and housing exclusions, you will need to file Form 2555 (instructions can be found here). File this form with your other tax forms.
Resources
IRS Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad
Related posts:
- How to Use the US Foreign Earned Income Exlusion (FEIE)
- Basics of US Income Taxes for Americans Living Overseas
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