The foreign housing exclusion: a guide for American expats
The foreign expatriate exemption is an unpopular way to save money and limit tax liability for American expats. FEIE does not require any additional paperwork and can significantly increase the affordability of living abroad. Learn more about how you can save money with the Foreign Housing Exclusion program
Home is where your heart is, no matter where you are on the map, whether it's sunny Spain or the snowy expanses of northern Canada. This is especially true for American expats who are forced to rethink the concept of home while living abroad. Leaving their home in the United States, they face the challenges of a new life. However, a great opportunity for them is the US tax cut for housing expenses abroad. This tax benefit allows expats to deduct housing expenses in another country, reducing their taxable income in the United States.
What is the foreign housing exclusion?
As a U.S. expatriate subject to worldwide taxation and taxed in the U.S., you are probably already familiar with the main expatriate tax benefit, the foreign earned income exclusion. Your earned income, up to the maximum exclusion amount of just over $100,000, can be completely exempt from U.S. taxation.
But if your income exceeds this amount, you have the option of taking advantage of other tax benefits to shield your additional income from U.S. taxes. This is where the foreign residence exclusion comes into play.
The foreign housing exclusion allows you to deduct excess employer-paid housing expenses that exceed 16% of your FEIE for the applicable year. This means that any qualified housing expenses in excess of $16,944 may be exempt from U.S. taxation. It is important to keep in mind the limitations on the amount of foreign housing expenses you can deduct, as discussed below.
So, the housing exclusion can be extremely useful, especially if your income exceeds the maximum allowed FEIE amount. The foreign tax credit can also be a significant help.
What housing expenses abroad can be excluded?
In addition to rent, there are various other qualified foreign housing expenses that can be taken into account in the calculations for tax exclusion. These expenses include:
1. Utilities, such as electricity bills;
2. Personal property insurance can also be included in the total amount of expenses for housing abroad;
3. The cost of renting accessories and furniture will also be included in the consideration of qualified expenses;
4. Renovations to your home abroad are also considered part of the housing costs that can be excluded.
It is important to remember that not all expenses can be taken into account when calculating the foreign housing exclusion. For example, purchasing furniture on Facebook Marketplace or having a cleaning lady, as well as mortgage payments, are not included in this exclusion. Therefore, it is important to clarify which expenses are included in the category of qualified expenses when calculating tax exemptions.
Filling out Form 2555 to foreign housing exclusion
To qualify for the exclusion, you will need to attach Form 2555 to your federal tax return. Foreign living expenses can be reduced using this strategy. Although it can be a bit complicated, you can reduce your US taxes with our guide and expert advice.
How to qualify for the FEIE
In order to enjoy the foreign expatriate housing exemption as a US expatriate, it is important to successfully qualify for the FEIE. There are two key steps to follow before you can receive the foreign exemption.
1. The physical presence test or the bona fide resident test. The physical presence test requires a stay outside the United States for 330 full days during a 12-month period beginning or ending in the tax year. The residency test requires being a resident of a foreign country and paying local income taxes for a full tax year.
2. Filling out Form 2555. After successfully completing the FEIE qualifications, fill out Form 2555, indicating which test you are using. Filing this form informs the IRS of your status and eligibility for the foreign earnings exclusion.
Taking these steps will allow you to take advantage of the exemption and effectively deal with the tax challenges associated with expatriation.
Calculate the foreign housing tax exclusion
Carefully review your receipts and calculate the amount of qualified foreign housing expenses during the tax year. To determine the limit of these expenses, multiply the maximum exclusion amount for the relevant tax period by 30%. This will give you the maximum amount that can be excluded from taxation.
If you live in a high-priced city such as London and face too high housing costs, don't worry. The IRS provides an option to increase the housing exclusion limit, particularly for U.S. citizens living abroad in high-cost cities. For more information, see page 7 of IRS Form 2555.
Now that you know the maximum amount to deduct your housing expenses, you can successfully complete the section "Exclusion of foreign housing expenses" on the appropriate form. It is important to remember that if you are an American abroad and filing jointly, you can claim the foreign housing exclusion only once.
Calculating the Foreign Housing Exclusion for the self-employed
If you are a self-employed American expatriate, it is important to understand that the foreign housing exclusion actually acts as a deduction. This means that you will need to include this information in Part IX of Form 2555.
The foreign housing deduction is an additional tax benefit that ensures that self-employed individuals earning additional income beyond the amounts provided by their employer can include the maximum foreign housing expenses on their U.S. income tax return. Instead of being excluded, this amount should be reported on Schedule 1, line 36.
Employment income includes various components, such as wages, fair market value of compensation, rent paid by the employer, as well as amounts covering relocation and tax equalization expenses. By taking these aspects into account, expats can maximize the deduction for housing abroad on their tax returns.
Daria Rogova, Head of Insurance at Visit World
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