Expat Housing Exclusion

Expatriate Tax  
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Ralph Sayers, CPA

Housing amount.   If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test, you may be able to claim an exclusion or a deduction from gross income for a housing amount.

A housing amount is the excess, if any, of your allowable housing expenses for the tax year over a base amount. Allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the tax year by you, or on your behalf, for your foreign housing and that of your spouse and dependents if they lived with you. You can include the rental value of housing provided by your employer in return for your services. You can also include the allowable housing expenses of a second foreign household for your spouse and dependents if they did not live with you because of dangerous, unhealthy, or otherwise adverse living conditions at your tax home. Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes.

The base amount is 16% of the annual salary of a GS-14, step 1, U.S. Government employee, figured on a daily basis, times the number of days during the year that you meet the bona fide residence test or the physical presence test. The annual salary is determined on January 1 of the year in which your tax year begins. You figure the base amount on Form 2555.

Exclusion.   You can exclude (up to the limits) your entire housing amount from income if it is considered paid for with employer-provided amounts. Employer-provided amounts are any amounts paid to or for you by your employer, including your salary, housing reimbursements, and the fair market value of pay given in the form of goods and services. If you have no self-employment income, your entire housing amount is considered paid for with employer-provided amounts.

If you claim the exclusion, you cannot claim any credits or deductions related to excluded income, including a credit or deduction for any foreign income tax paid on the excluded income.

Deduction.   If you are self-employed and your housing amount is not provided by an employer, you can deduct it in arriving at your adjusted gross income. However, the deduction cannot be more than your foreign earned income for the tax year minus the total of your excluded foreign earned income plus your housing exclusion.

Carryover.   If you cannot deduct all of your housing amount in a tax year because of the limit, you can carry over the unused part to the following year only. If you cannot deduct it in the following year, you cannot carry it over to any other year. You deduct the carryover in figuring adjusted gross income. The amount of carryover you can deduct is limited to your foreign earned income for the year of the carryover minus the total of your foreign earned income exclusion, housing exclusion, and housing deduction for that year.

Choosing the exclusion(s).   You make separate choices to exclude foreign earned income and/or to exclude or deduct your foreign housing amount. If you choose to take both the foreign housing exclusion and the foreign earned income exclusion, you must figure your foreign housing exclusion first. Your foreign earned income exclusion is then limited to the smaller of (a) your annual exclusion limit or (b) the excess of your foreign earned income over your foreign housing exclusion.

Once you choose to exclude your foreign earned income or housing amount, that choice remains in effect for that year and all future years unless you revoke it. You can revoke your choice for any tax year. However, if you revoke your choice for a tax year, you cannot claim the exclusion again for your next 5 tax years without the approval of the IRS. For more information on revoking the exclusion, see chapter 4 of Publication 54.

Married couples.    If both you and your spouse are eligible for the exclusion(s), see chapter 4 of Publication 54.

Exclusion of employer-provided meals and lodging.   If as a condition of employment you are required to live in a camp in a foreign country that is provided by or for your employer, you can exclude the value of any meals and lodging furnished to you, your spouse, and your dependents. For this exclusion, a camp is lodging that is:

1. Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance,

2. Located as close as practicable in the area where you work, and

3. Provided in a common area or enclave that is not available to the public for lodging or accommodations and that normally houses at least 10 employees.