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IRS provisions like the Foreign Housing Exclusion often aren’t the first thing US expats think about when moving overseas, but they should be!
All US citizens and permanent residents are required to file a federal US tax return every year, even if they live and pay taxes outside the US. While this is a hassle, the right strategy and knowledge can oftentimes eliminate the risk of double taxation — and one of the most powerful tools at your disposal is the Foreign Housing Exclusion (FHE).
Below, we’ll go over what the FHE is, what it covers, who qualifies for it, how to claim it, and more.
What is the Foreign Housing Exclusion?
The Foreign Housing Exclusion is a tax exclusion that is claimed on IRS Form 2555. This exclusion enables US citizens or residents living abroad to exempt reasonable housing expenses from income that would otherwise be taxable, ultimately helping to minimize their tax liability.
What counts as a reasonable housing expense?
Several housing expenses qualify as deductible, including:
- Rent
- Utilities (e.g. water, electricity)
- Necessary repairs
- Property insurance
- Application fees
- Occupancy taxes
- Residential parking fees
- Rental of furniture and accessories
However, some expenses do not qualify as reasonable, such as:
- Purchased furniture
- Phone, internet, and TV/streaming services
- Mortgage payments
- Cleaning or housekeeping services
- Renovations designed to increase the value of the property
- Lavish expenses
Check with a tax professional to confirm your expense categorizations.
Pro tip:
Additionally, the FHE is only applicable to income received from an employer. If you’re self-employed, you can still claim the Foreign Earned Income Exclusion, but you should not fill out the Foreign Housing Exclusion section on Form 2555. Instead, you would claim the Foreign Housing Deduction.
Who qualifies for the Foreign Housing Exclusion?
The qualifications for the FHE are the same as they are for the Foreign Earned Income Exclusion (FEIE) — you must pass either the Bona Fide Residence Test or the Physical Presence Test.
To pass the Bona Fide Residence Test, you need to provide evidence of being a tax resident in another country for at least one full tax year. Things like rental contracts, utility bills, employment contracts, visas, or foreign tax returns can all serve as proof that you are a bona fide resident outside of the US.
Alternatively, to pass the Physical Presence Test, you must be able to prove that you spent a minimum of 330 days during any 365-day period outside of the US i.e. in a foreign country.
Claiming the Foreign Housing Exclusion on Form 2555
Like the Foreign Earned Income Exclusion (FEIE), you claim the Foreign Housing Exclusion using Form 2555. The key difference is that the FEIE applies to your total foreign earned income, like salary or wages, whereas the FHE applies to the housing expenses mentioned above.
One key difference between the two is that self-employed individuals may claim the FEIE, but not the FHE.
What is the Foreign Housing Exclusion limit?
The Foreign Housing Exclusion limit is predicated on the FEIE. The FEIE limit is indexed annually for inflation, meaning that the amount typically increases. Since the FHE is calculated based on the FEIE, that amount typically increases, too.
How to Calculate the Foreign Housing Exclusion
In the 2023 tax year (return filing due in the year 2024), the FEIE limit is $120,000.
To calculate the FHE, use the following steps:
- Multiply the FEIE limit by 16%. This will calculate the base housing amount. For the 2023 tax year, this looks like 120,000 x 0.16. So, the base amount is $19,200. The base amount is what the IRS assumes you would have paid for housing had you resided in the US.
- Next, you’re going to calculate a figure referred to as the “general limit.” Multiply the FEIE limit by 30%. Again, for the 2023 tax year, this looks like 120,000 x 0.30. The general limit here is $36,000.
- Now, you’re ready to calculate the maximum housing exclusion. Subtract the general limit from the base amount, which for the 2023 tax year is 36,000 – 19,200. The total here is $16,800, which amounts to the total you can exclude as a foreign housing expense.
You’re not quite done yet!
To claim the maximum amount possible, you must justify your calculation for the final figure. So, take the general maximum housing exclusion we just calculated, 16,800, and divide that by 365 (for the total days in a year). 16,800 / 365 = 46.03.
$46.03 is the amount you’re eligible for per day spent outside the US. Now, to calculate how much of the maximum housing expense limit you’re allowed to claim, multiply that figure by the number of days you spent outside the US. If, hypothetically, you were outside the US for 326 days, that calculation would look like 46.03 x 326, giving you your FHE total: of $15,005.78. Again, hypothetically, if your total housing expenses for the year were $23,000, you could offset the difference and only be tax liable for $7,994.25.
Don't leave money on the table! 💸
The general limit does not apply to all countries. Take care to review the back of Form 2555 to ascertain whether your country has a specific agreed-upon figure with the IRS. Neglecting to do this could cost you serious tax dollars!
Claiming the Foreign Housing Exclusion
To claim the FHE, you’ll have to claim the FEIE. You can do this by filing IRS Form 2555 along with your US tax return. The form consists of nine parts in total:
- Part I: Personal details like your name and full foreign address
- Part II: Start dates, end dates (if applicable), and other details of your Bona Fide Residence
OR
- Part III: Log of the dates you spent in and outside of the US as part of your Physical Presence Test and other details related to your stays
- Part IV: Details of the income you earned outside of the US
- Part V: Indicate whether you plan to claim the FHE
- Part VI: Calculate your FHE
- Part VII: Calculate your FEIE
- Part VIII: Enter the total of your FEIE and FHE if you plan on claiming it
- Part IX: Calculate your Foreign Housing Deduction, if self-employed
Claiming the Foreign Housing Exclusion when married
This question applies when both partners have US tax-paying obligations. In cases where one spouse is a non-resident alien (NRA), then the FHE can be claimed by the spouse obliged to file with the IRS.
Alternatively, if you live in separate households, each partner can file separate claims, with each claiming the FHE for their respective household. For example, when a married couple is filing jointly and living in the same household, the FHE would only be applied to Form 2555 of one spouse within their joint tax return.
On the other hand, if you live in separate households, you can file separate claims with each partner claiming the FHE for their respective household. However, your households can’t be within commuting distance of one another. Furthermore, there are many benefits to filing jointly, so filing separate returns with independent FHE claims isn’t guaranteed to be a better option than filing jointly with one FHE claim.
