What is the Foreign Housing Exclusion for Expats?

As an American expatriate, reducing your taxable foreign income however possible is always ideal. One way to do this and lower your tax liability to the IRS while living overseas is by claiming the foreign housing exclusion.

If you live and work abroad as an American expatriate, you may be able to claim the foreign housing exclusion. This allows you to deduct certain household expenses from your taxable income, reducing your tax liability to the IRS as an expat. To qualify for this beneficial deduction, you must meet either the bona fide residence test or the physical presence test. Expats can claim the foreign housing exclusion by completing IRS Form 2555 and submitting it by Tax Day.

Our tax CPAs are here to help expats understand how to reduce their tax liability while living overseas by claiming the foreign housing exclusion. To learn more about the tax accountants for American expatriates at US Tax Help, call today at (541) 362-9127.

How Does the Foreign Housing Exclusion Help Expats?

The foreign housing exclusion, which often goes hand in hand with the foreign earned income exclusion, allows certain American expats to deduct specific housing-related expenses from their taxable income. This can reduce your tax liability to the United States while living abroad.

As an American expatriate, you still have to report your income and certain financial information to the IRS. The United States has a citizenship-based taxation system, so you must pay taxes regardless of where you live. However, the IRS does recognize that it’s not fair for expats to pay taxes twice on the same income, especially if they work abroad. The IRS also recognizes that certain housing expenses paid for by a foreign income should be deductible. That is why the IRS allows expats to claim the foreign housing exclusion alongside the foreign earned income exclusion.

This exclusion lets expat deduct certain household expenses, like rent, from their taxable income, reducing their tax liability to the IRS. Filing for the foreign housing exclusion can be complicated, so reach out to our tax accountants for American expatriates for help. Claiming the foreign housing exclusion is often beneficial for expats, especially if they want to reduce their taxable income while living abroad.

How Do Expats Qualify for the Foreign Housing Exclusion?

Simply earning paying rent abroad is not reason enough to qualify for the foreign housing exclusion. American expatriates must meet either the bona fide residence test or the physical presence test to claim the foreign housing exclusion and reduce their tax liability to the IRS.

Bona Fide Residence Test

To meet the bona fide residence test, American expats must establish residency in another country, which usually means cutting certain ties with the United States. Maintaining property, bank accounts, or employment in America might make you fail the bona fide residence test and disqualify you for foreign housing exclusion.

Physical Presence Test

If you meet the physical presence test, you may be able to claim the foreign housing exclusion as an American expatriate. Essentially, the physical presence test requires expats to remain physically in their country of residence for a full 330 days out of the year. Do this, and you may be able to claim the foreign housing exclusion come to Tax Day.

What is the Foreign Housing Exclusion Amount?

The IRS only allows U.S. expats to claim a certain amount under the foreign housing exclusion. Calculating this amount can be complicated, so it’s a good idea to consult our tax accountants for American expatriates so that you claim the full amount available to you.

In order to calculate the maximum amount, you can claim under the foreign housing exclusion, you have to use the IRS’s complex equation. Figuring it requires an in-depth understanding of how the foreign housing exclusion and the foreign earned income exclusion relate to one another, as well as your relationship to the base housing amount, which is 16% of the exclusion divided 365 (366 for leap years), then multiplied by the amount of days in a tax year that you qualify for the foreign housing exclusion. Clearly, this can get confusing.

Figuring out the exact amount you can claim can be challenging, as the IRS forbids expats from deducting costs for lavish or unnecessary housing expenses. To learn how much you can claim in deductions according to the foreign housing exclusion, consult our tax accountants for American expatriates.

How Can Expats Claim the Foreign Housing Exclusion?

In order to claim the foreign housing exclusion, you must submit Form 2555 to the IRS by Tax Day. Fail to do so, and you may lose your ability to reduce your tax liability to the IRS by claiming the foreign housing exclusion.

Expats use Form 2555 to claim both the foreign housing exclusion and the foreign earned income exclusion. To properly complete this form, you will need to provide a significant amount of detailed information, which is why seeking help from our tax accountants for American expatriates is wise. Our professionals can help you properly gather the necessary information to file Form 2555 with the IRS.

IRS Form 2555 is due on Tax Day, along with your annual tax return. The IRS allows an automatic two-month extension for U.S. expatriates who don’t file in time. After that point, expats may be unable to claim the foreign housing exclusion for that tax year.

Ask Our Tax CPAs About the Foreign Housing Exclusion Today

If you need assistance claiming the foreign housing exclusion, our professionals can help. To learn more about the tax accountants for American expatriates at US Tax Help, call today at (541) 362-9127.