Foreign Housing Exclusion And Deduction

WHAT IS THE Foreign Housing Exclusion And Deduction

The foreign housing exclusion and deduction is an allowance for taxpayers who live and work in a foreign country to exclude any amount that their employer allocates to them to cover costs related to housing. The exclusion applies regardless of whether the expenses are paid directly to the taxpayer or paid on their behalf.  The foreign housing exclusion or deduction is computed in parts VI, VIII, and IX of Form 2555. 

BREAKING DOWN Foreign Housing Exclusion And Deduction

To qualify for the foreign housing exclusion and deduction, taxpayers must meet the same time criteria as for the bona fide resident or physical-presence tests. Also, the housing exclusion applies only to amounts considered paid for with the amounts provided by the employer, which include any amounts paid to the individual or paid or incurred on their behalf by their employer that are considered taxable foreign earned income. The housing deduction applies only to amounts paid for with self-employment earnings.

The housing amount is the total of housing expenses for the year minus the base housing amount. The computation of the base housing amount is tied to the maximum foreign earned income exclusion. The amount is 16 percent of the maximum exclusion amount, which computed daily, multiplied by the number of days in the qualifying period that fall within the individual’s tax year.

Housing expenses include reasonable expenses actually paid or incurred for housing in a foreign country for the individual, their spouse and their dependents, provided they lived abroad as well.  Qualifying expenses may also include payments intended to equalize taxes and education expenses for the taxpayer's children or dependents. Costs relating to the purchase of property or the employ of domestic servants do not qualify for the exclusion. Housing expenses do not include expenses deemed lavish or nonessential under the circumstances. 

Foreign Housing Exclusion And Deduction Limits

The limit on housing expenses is generally 30 percent of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses. Also, foreign housing expenses may not exceed the individual’s total foreign foreign earned income for the taxable year. The foreign housing deduction cannot be more than their foreign earned income less the total of their foreign earned income exclusion, plus their housing exclusion. The limit on housing expenses varies depending upon the location in which you incur housing expenses.  The limit on housing expenses is computed using the worksheet on page 3 of the instructions for Form 2555.

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  1. Internal Revenue Service. "Foreign Housing Exclusion or Deduction." Accessed Nov. 20, 2020.

  2. Internal Revenue Service. "Form 2555: Foreign Earned Income," Page 3. Accessed Nov. 20, 2020.

  3. Internal Revenue Service. "Instructions for Form 2555 (2019)." Accessed Nov. 20, 2020.

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