Foreign Housing Exclusion And The Foreign Earned Income Exclusion
The foreign housing exclusion complements the foreign earned income exclusion that is reported on the Form 2555 and can increase your available exclusion amount.
This is an additional exclusion for your housing costs if your tax home is in a foreign country and you qualify for the foreign earned income exclusion.
The foreign housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion).
Employer-provided amounts does not mean that the employer must acquire or pay for the housing. Rather, as long as the housing was paid from your earned income (i.e. you paid from your received wages), this will be considered employer-provided amounts.
The foreign housing deduction applies only to amounts paid for with self-employment earnings.
Your foreign housing amount is the total of your housing expenses for the year minus the base housing amount. The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. The amount is 16% of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year.
Thus, it is important to determine what your total qualified foreign housing amounts or housing expenses are for the tax year.
What Are Qualified Foreign Housing Expenses?
Housing expenses include your reasonable expenses actually paid or incurred for housing in a foreign country for you and your spouse and dependents (as long as they live with you in the foreign country). Consider only housing expenses for the part of the year that you qualify for the foreign earned income exclusion.
Housing expenses include:
- Fair market value of housing provided in kind by your employer
- Utilities (other than telephone charges)
- Real and personal property insurance
- Non-deductible occupancy taxes
- Non-refundable fees for securing a lease
- Rental of furniture and accessories
- Residential parking
Housing expenses do not include expenses that are lavish or extravagant under the circumstances, deductible mortgage interest and real estate/property taxes, principal payments on a mortgage, the cost of buying property, purchased furniture or accessories, the cost of domestic labor (maids, gardeners, etc.), cable/satellite television subscriptions and improvements and other expenses that increase the value or appreciably prolong the life of your property.
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