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Maximizing tax savings with the Foreign Housing Exclusion

Maximizing tax savings with the Foreign Housing Exclusion

This article is for informational purposes only and does not constitute legal or tax advice.

Always consult with a tax professional for your specific circumstances.

Living and working abroad can be an exciting adventure, but it comes with its own set of financial challenges.

One of the perks for US expats is the Foreign Housing Exclusion, a tax benefit that can significantly reduce your taxable income.

Let's dive into the nitty-gritty of this exclusion and how you can make the most of it.

What is the Foreign Housing Exclusion?

The Foreign Housing Exclusion allows US expats to exclude certain housing expenses from their taxable income.

This can include rent, utilities, property insurance, and other reasonable costs related to maintaining a home abroad.

The IRS created this exclusion to help offset the higher cost of living that often accompanies international assignments.

Key benefits:

  • Reduces taxable income: By excluding qualified housing expenses, you can lower your overall tax liability.
  • Works with FEIE: The Foreign Housing Exclusion can be used alongside the Foreign Earned Income Exclusion (FEIE), allowing you to maximize your tax savings.

Who qualifies for the Foreign Housing Exclusion?

To qualify for the Foreign Housing Exclusion, you must first meet the criteria for the FEIE, which means passing either the bona fide residence test or the physical presence test.

Bona fide residence test

This test requires you to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

Essentially, you need to have set up a long-term residence in another country.

Physical presence test

If you're more of a globe-trotter, the physical presence test might be your ticket.

You need to be physically present in a foreign country for at least 330 full days during any 12-month period. The days don’t have to be consecutive, but they do need to add up to 330 days within the specified timeframe.

Calculating the Foreign Housing Exclusion

Base housing amount

The base housing amount is 16% of the maximum FEIE.

NB! For 2024, the FEIE is $126,500, making the base housing amount $20,240.

Your qualified housing expenses must exceed this base amount to be eligible for the exclusion.

Qualified housing expenses

Qualified housing expenses include:

  1. Rent
  2. Utilities (excluding phone and cable)
  3. Property insurance
  4. Repairs
  5. Parking fees

Non-qualifying expenses include lavish or extravagant costs, property purchases, and domestic labor costs.

How much can you exclude?

For 2024, the maximum foreign housing exclusion is 30% of the FEIE, which is $37,950.

However, the exact amount can vary depending on your location and the number of qualifying days in the tax year.

Common misconceptions

There are a few misconceptions about the Foreign Housing Exclusion that often trip up expats:

  1. Short-term assignments qualify: Unfortunately, working overseas for just a few months won't cut it. You need to meet the full-time residence or physical presence criteria.
  2. Government Employees Are Eligible: US Government employees are not eligible for the FEIE or the Foreign Housing Exclusion.
  3. All Expenses Are Deductible: Only reasonable, necessary expenses qualify. Luxuries or non-essential costs won't make the cut.

Claiming the Foreign Housing Exclusion

Form 2555

To claim the Foreign Housing Exclusion, you'll need to file IRS Form 2555 alongside your annual tax return.

The specific sections for the housing exclusion are parts VI, VIII, and IX.

It’s crucial to fill out the entire form to affirm your eligibility for both the FEIE and the Foreign Housing Exclusion.

Form 2555 preview



Professional assistance

Handling these exclusions can be tricky, especially with the varying rules and regulations that apply to different countries.

The complexities involved in accurately calculating and claiming the foreign housing exclusion can lead to costly mistakes if not handled properly.

Therefore, seeking help from tax professionals who specialize in expatriate tax services is advisable. 

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Example: expatriate tax savings scenario

Let’s look at a hypothetical case.

Mike P., a US citizen, moved to Tokyo for a job assignment in January 2024. He rents an apartment for $3,500 per month and incurs $500 in utilities monthly.

Here’s how he can benefit from the Foreign Housing Exclusion:

  1. Total housing expenses: $3,500 (rent) + $500 (utilities) = $4,000/month
  2. Annual housing expenses: $4,000 x 12 months = $48,000
  3. Base housing amount: $126,500 x 16% = $20,240
  4. Excludable amount: $48,000 - $20,240 = $27,760

Mike can exclude $27,760 from his taxable income, significantly reducing his tax liability.

Bottom line

The Foreign Housing Exclusion is a powerful tool for US expats to manage their tax burdens while living abroad.

By understanding the eligibility requirements, calculating your expenses accurately, and seeking professional advice, you can maximize your savings and enjoy your international adventure with fewer financial worries.

Ines Zemelman, EA
Founder of TFX