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The foreign housing exclusion or deduction is an allowance for taxpayers who live and work in a foreign country that excludes from income taxes any amounts that their employers allocate to them to cover their housing costs.
The exclusion applies regardless of whether the expenses are paid directly to the taxpayer or paid on their behalf.
The foreign housing exclusion or deduction is computed in parts VI, VIII, and IX of IRS Form 2555.
Key Takeaways
- The foreign housing exclusion or deduction allows taxpayers living and working abroad to exclude employer-paid housing costs from their gross income.
- The tax break is available to workers and their families if all live abroad.
- The maximum exclusion is for 30% of income but there is a cap, which is adjusted yearly.
For the 2024 tax year, the maximum foreign earned income exclusion is $126,500. For the 2025 tax year, the figure rises to $130,000.
Understanding the Foreign Housing Exclusion or Deduction
To qualify for the foreign housing exclusion or deduction, taxpayers must meet the same time criteria as a bona fide resident or pass physical presence tests.
The housing exclusion applies only to amounts paid for with money provided by the employer, which can include any amounts paid to the individual or paid on their behalf by the employer that are considered taxable foreign earned income.
The housing deduction applies only to amounts paid for with self-employment earnings.
How to Calculate It
The housing amount is the total of housing expenses for the year minus the base housing amount. The computation of the base housing amount is tied to the maximum foreign earned income exclusion. The amount is 16 percent of the maximum exclusion amount, which is computed daily and multiplied by the number of days in the qualifying period that fall within the individual’s tax year.
Housing expenses include reasonable expenses paid for housing in a foreign country for the individual, spouse, and their dependents, provided they lived abroad as well.
Qualifying expenses may also include payments intended to equalize taxes and education expenses for the taxpayer’s children or dependents.
Costs relating to the purchase of property or the employment of domestic servants do not qualify for the exclusion. Housing expenses do not include expenses deemed lavish or nonessential under the circumstances.
Foreign Housing Exclusion or Deduction Limits
The limit on housing expenses is generally 30 percent of the maximum foreign earned income but may vary depending on the location in which the housing expenses are incurred.
Also, foreign housing expenses may not exceed the individual’s total foreign foreign earned income for the taxable year.
The foreign housing deduction cannot be more than their foreign earned income less the total of their foreign earned income exclusion, plus their housing exclusion.
The limit on housing expenses is computed using the worksheet on page 3 of the instructions for Form 2555.
Do Americans Living Abroad Have to File U.S. Taxes?
Yes. American citizens living abroad are required to file income taxes every year, just as residents do. If they earn money in any other currency, they have to translate it into U.S. dollars to report it, and exchange it into U.S. dollars to pay it.
That said, most nations have treaties with the U.S. that require American expats to pay taxes to the foreign jurisdiction, which are then deducted from their tax obligation to the U.S. This should cancel out the taxes owed to the U.S., but they still have to file the paperwork.
What Extra Paperwork Do Expats Have to File With Their Taxes?
In addition to the all-important Foreign Housing Exclusion or Deduction, which could save them big bucks, Americans living and working abroad have to report any foreign bank and brokerage accounts they have.
Actually, this disclosure is required of all taxpayers, but a foreign bank account might be an essential to Americans living and working abroad.
Is the Federal Tax Deadline the Same for U.S. Expats?
Americans living and working abroad get an automatic two-month extension on the filing date. So, instead of April 15, the usual date for filing moves to June 15, or the following business day if the date falls on a weekend.
The Bottom Line
The foreign housing exclusion or deduction is a very big deal for Americans living and working abroad. If their employer is paying for their housing, they can deduct most or all of those payments from their gross income when filing their U.S. taxes.