Monday, August 1, 2016

US Citizen Living Abroad & The Foreign Housing Exclusion.

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Having moved around a lot growing up, I think I have had the most unique of experiences and have learnt to assimilate wherever I am and make connections with people. But of course, I never saw it as an advantage while I was still little. Having to say good-bye to friends more often than not and starting over in a new place was painful. Even with all the world-wide turmoil these days, travel continues to fascinate me. My husband & I would like to travel a lot when we are retired, which definitely differs from moving house from place to place, and that brings us to today's topic. 

If you are a regular on my blog, you know that US Citizens and Green Card holders no matter where they live, have to pay taxes on their world-wide income. But if they live outside the United States, they may however qualify to exclude some or all amounts from taxes by way of the Foreign Earned Income Exclusion {FEIE} and the Foreign Housing Exclusion. 

To be eligible to claim the foreign housing exclusion, first & foremost the taxpayer must be eligible to claim the FEIE. What that means is that he/ she should have a valid election in place for the year in question. For more information on the FEIE, please see my blog post here 

The foreign housing exclusion applies only to amounts that are considered paid for with employer-provided amounts for services provided in a foreign country. These are mostly wages and salaries, FMV of compensation provided in kind, amounts paid by employer as reimbursement for housing expense etc. 

Foreign Housing Exclusion Calculation: The maximum Foreign Earned Income Exclusion { FEIE } for 2015 was $100,800. The housing amount excludable would be calculated as the total housing expenses paid reduced by the base housing amount, which is 16% of max FEIE. Not only are the total housing costs incurred reduced by the base amount, they cannot exceed 30% of of the max FEIE.  

Notes of Caution: 
  • Not all overseas locations are "foreign countries", for example, U.S. possessions and territories, Antarctica, international air-space or waters. 
  • If a taxpayer is eligible under a tax treaty in the country of bonafide residence for a credit for the amounts excluded under the FEIE or the Foreign Housing Exclusion, he will have to choose one of the two methods to save on taxes--not both! 
  • Foreign earned income from self-employment is NOT eligible for the housing exclusion.

One has to be careful what one includes as housing expenses for the above calculation. Expenses considered "lavish or extravagant under the circumstance" are payments on a mortgage to buy foreign property, deductible interest and taxes paid on such property, cost of domestic labor, television subscriptions, expenses for more than one foreign property, etc. Taking excessive housing expense deduction is a definite audit red flag.

Like I always say, if any of the above apply to you, speak to an Enrolled Agent who specializes in cross-border taxation and/ or expatriation taxation. Most D-I-Y software do not handle these calculations correctly and you may leave a lot of money that you could have rightfully claimed as deductions on the table. 

Bibliography: IRC § 911; Form 2555; IRS Pub 54. 

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Please read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com