What Expenses Qualify for the Foreign Housing Deduction or Exclusion?March 27, 2017
Are you a U.S. citizen residing overseas? There is a tax break with your name on it!
If your tax home is located overseas, you could qualify for a tax break, formally known as the Foreign Housing Exclusion (or deduction... depends on your employment status).
First things first
You will need to pass one of these qualification tests:
- Bona fide residence test-
- You must be a U.S. citizen, or a resident alien living in a country that has a tax treaty with the United States.
- Your actions must be considered resident-worthy. The IRS will analyze your intentions and actions, purpose of your trip, the nature and length of your stay.
- You must live in the foreign country for an entire tax year (most taxpayers use the calendar year as their fiscal or tax year, so January 1st through December 31st).
- Physical presence test- You must be physically present in a foreign country (or multiple countries) for 330 full days during a 12 month period to pass the physical presence test. The months must be consecutive, however, the 330 qualifying days don't have to be consecutive. You can count days you spent abroad for any reason (employment purposes, vacation time, etc.).
What kind of housing expenses are included?
- Reasonable expenses actually paid or incurred for housing in a foreign country for you and your dependents.
- You only factor in the expenses for the part of the year you qualify for the exclusion or deduction.
There are a few costs not included under applicable housing expenses like lavish or extravagant additions to the home, furniture, accessories, improvements, and other expenses that increase the value or “appreciably prolong” the life of the property. Also you cannot include lodging expenses that you have already excluded from gross income or that you deducted as moving expenses.
Also, there is a limit to how much you can deduct or exclude. Your housing expenses is limited to the smaller of the actual expenses or the maximum allowed for the location less the base housing amount of $16,336 for 2017.
Deduction vs. exclusion
The housing exclusion applies only to amounts considered paid for with employer-provided amounts. The housing deduction applies only to amounts paid for with self-employment earnings (which will not reduce self-employment tax).
What is your housing amount?
Your housing amount is the total of your housing expenses for the year minus the base housing amount. To calculate the base housing amount you take 16% of the maximum exclusion amount indexed annually for inflation (which is computed on a daily basis), and multiply it by the number of days in your qualifying period that falls within your tax year.
Form 2555 is where the foreign housing exclusion or deduction is computed (parts VI, VIII, and IX).
Need help determining your deduction/exclusion? Our Global Tax Services Team can help.