Foreign Housing Deduction and Exclusion
Living overseas you can deduct or exclude my foreign housing costs
But only if you meet certain conditions. The foreign housing exclusion and deduction are in addition to the foreign earned income exclusion. You can claim the exclusion or deduction from you gross income but you must make the election if you qualify.
The requirements to exclude foreign housing costs.
To qualify for the foreign housing deduction or exclusion you must
The requirements to deduct foreign housing costs.
Foreign housing costs qualify for the exclusion and deduction.
Qualified housing expenses include any reasonable expenses you have paid for or incurred for housing in a foreign country for you and (if they live with you) for your spouse and dependents. You can only take into consideration those housing expenses for the part of the year that you qualify for the foreign earned income exclusion.
Foreign housing costs that do not qualify for the exclusion and deduction.
Limitations on foreign housing costs.
The housing cost amount is considered your total allowable foreign housing expenses minus the base housing amount. The calculation to arrive at the amount you can deduct or exclude from your income involves 3 steps.
Step 1 – Calculate your base housing amount. Your base housing amount is 16% of the maximum foreign earned income exclusion for the tax year. If you qualify for the foreign earned income exclusion for part of the year, you must multiply the daily rate times the number of days you qualify for the foreign earned income exclusion. The base housing amount is the amount you cannot exclude. Consider this amount to be the typical amount you would have spent on housing if you were living in the US
Step 2 – Determine your limit on housing expenses. Housing expenses are generally limited to 30% of the maximum foreign earned income exclusion for the tax year. However, if you live in an area that is deemed to be a high-cost area, your exclusion will be higher.
Step 3 – Subtract your base housing amount from you eligible housing expenses.
An important note in regards to taking the foreign housing credit or deduction; your foreign earned income will be reduced by Your Foreign Housing Exclusion. You must subtract Your Foreign Housing Exclusion from your foreign earned income.
If housing expenses exceed the housing limit you can carryover any unused amounts.
You can only carry over to the next year any part of your housing deduction that is not allowed because of the limit. This means it is only available to self-employed individuals and they are only allowed to carry over your excess housing deduction to the next year. If they cannot deduct it in the next year, the excess amount cannot carry over to any other year.
You must use tax Form 2555 to claim the foreign housing exclusion. The Form 2555-EZ cannot be used.
Both spouses can claim the foreign housing exclusion or deduction.