In the last post, I discussed the Foreign Earned Income Exclusion (FEIE), and how it can save you a boatload of money.
In addition, us US expats can also take advantage of the Foreign Housing Exclusion.
The Foreign Housing Exclusion allows you to deduct the excess of housing expenses, paid by employer-provided amounts that are over 16% of the FEIE amount of that year. This means that any qualified housing expenses over $16,944 (in 2019) might be eligible for US tax exemption.
In short – this means that the amount you pay for rent and utilities (over $16,944) can be deducted from your federal taxes – how cool is that?!
That certainly helps with our high electric bills in the summer!
Before we go too far here – please remember that I am not a tax pro! I’m just some dude on the internet with a blog. Don’t trust anything I say – especially when it comes to taxes! Seek out professional tax advice and be sure to consult the IRS for your particular situation.
Which expenses can be deducted?
- Utilities (such as electricity and water, but not telephone or internet)
- Personal property insurance
- Household repairs
Which expenses are not deductible?
- Expenses that are lavish or extravagant
- Costs of buying property
- Purchased furniture or accessories
- Mortgage payments
- Household labor
- Property improvements
- Pay television subscriptions (such as Cable TV or Netflix)
In order to qualify for the Foreign Housing Exclusion, you need to meet the same qualifications as for the FEIE – either by using the bona fide residence or physical presence test. When you qualify for the FEIE, you also qualify to use the foreign housing exclusion
You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive.
Keep in mind that the foreign housing exclusion is for employees only; if you are self-employed, you’ll want to use the foreign housing deduction (instead of the exclusion).
How much is the exclusion?
Your housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location in which you incur your housing expenses.
In 2019, for most locations, this limit is $31,770 (30% of $105,900) if your qualifying period includes all of 2019 (or $87.04 per day if less than 365 days).
For Mexico, depending on where you live, the limit can be even higher. For cities in the state of Quintana Roo (such as Puerto Morelos), the limit is $39,400. For Mexico City, it’s $47,900! And for a crazy expensive city like Hong Kong, it’s $114,300!
Note that foreign housing expenses may not exceed your total foreign earned income for the taxable year.
The formula for calculating the exclusion is:
Max housing exclusion = Housing expense limit (30% of the FEIE) – Base housing cost (16% of the FEIE)
For 2019, this works out to $14,826 (This is the maximum exclusion amount)
For those of us in Quintana Roo (and many other parts of Mexico), the max exclusion amount is even higher.
$39400 – (.16 * $105900) = $22,456
If all of that seems confusing, don’t worry. The IRS form 2555 is pretty simple, and walks you through the calculations.
Refer to the IRS publication Instructions for Form 2555 for the specific amount that you can deduct.
- IRS page on Foreign Housing Exclusion or Deduction
- What Every Expat Needs to Know About the Foreign Housing Exclusion
By far, the biggest potential tax advantage for expats is the FEIE.
But the Foreign Housing Exclusion can also make a substantial dent in your taxes. And of course, there’s still the standard deduction.
So, if we pull all of that together:
$105,900 (FEIE, spouse #1)
$105,900 (FEIE, spouse #2)
$24,400 (Standard deduction, married filing jointly)
$22,456 (Foreign Housing Exclusion, for Quintana Roo)
That’s over a quarter of a million dollars, excluded from federal income taxes!
Of course, not everyone has 2 spouses making six figures worth of foreign income (we don’t, just for the record!) – but anything under this amount still qualifies.
There are definitely some potentially huge tax savings available by being a US expat!
If you think the FEIE and Foreign Housing Exclusion could apply to you – definitely check them out. Oh, and definitely considering talking to a tax pro (which I am not!)
You must pay taxes. But there’s no law that says you gotta leave a tip.Morgan Stanley