A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”. Self-employed persons cannot claim the foreign housing exclusion. Self-employed taxpayers living abroad must claim the foreign housing deduction instead. (See Publication 54, specifically, the section on the foreign housing deduction.)
Generally, the allowable housing expenses that one can exclude (or deduct, if self-employed) are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing. The housing costs include those of the spouse and dependents if they lived with the taxpayer. Allowable housing expenses do not include the cost of a home purchase or other capital items, wages of domestic servants, or deductible interest and taxes.
- Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still exclude the full amount permitted under the foreign housing exclusion rules. This is not so. The taxpayer must actually incur the claimed amounts in rental payments.
- In many cases, a taxpayer will purchase and own his own home in a foreign country, and will not pay rent. The foreign housing exclusion or deduction cannot be claimed in this instance. This comes as a surprise to many taxpayers. To be eligible, the taxpayer must actually incur the amounts in allowable housing expenses (for example, rent paid to the landlord on the employee’s behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).
- If both spouses work and both receive housing amounts from their employer, only one housing exclusion can be claimed.
To be eligible for exclusion from tax (or deduction), the allowable housing expenses must exceed a so-called “base housing amount”. The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2016, this “base housing amount” is US$16,208 (computed as follows: 16% x US$101,300, which is the 2016 FEIE amount). Reasonable foreign housing expenses in excess of the “base housing amount” are eligible for the exclusion, but such expenses are subject to a maximum ceiling which is generally 30 percent of the taxpayer’s foreign earned income exclusion. For 2016 30% of the FEIE is $30,390; computed by taking 30% of $101,300. Therefore, for 2016 many taxpayers may only exclude from income the difference between the $30,390 limitation and the $16,208 base housing amount, or $14,182. This number will be higher for Americans employed and living in high-rent cities as determined by the Internal Revenue Service (IRS). For example, as relevant to many of my readers, Dubai and Abu Dhabi in the United Arab Emirates are included on the list of cities where housing costs are greater. Further details are discussed below.
2016 Geographic Housing Cost Allowances
The IRS was given authority to issue regulations or other guidance providing for the adjustment of this 30 percent maximum ceiling limitation based on geographic differences in housing costs relative to housing costs in the United States. In 2016, for those in Dubai, the IRS granted an adjustment of this 30 percent maximum ceiling limitation and increased it to a maximum of US$57,174. For those living in Abu Dhabi, the maximum ceiling is US$49,687. See IRS Notice 2016-21. These ceiling limitations have not changed over the past several years (e.g., see IRS Notice 2013-31).
Using the newly announced numbers, an employee paying rent in Dubai can exclude from income the difference between the IRS announced limitation for Dubai (for 2016 this number is $57,174) and the $16,208 “base housing amount”. Since the FEIE has risen, the “base housing amount” (which is the amount on which tax must be paid) has likewise increased. This means that less employer-provided housing amounts can be excluded than in earlier years. Using these figures, for 2016 an employee residing in Dubai can exclude $40,966 of employer provided housing amounts from income provided that the amounts are actually used for that purpose. By comparison, that same employee could have excluded $41,558 in 2013. For an employee living in Abu Dhabi, he can exclude US$33,479 of employer provided housing amounts, computed by subtracting the $16,208 “base housing amount” from the ceiling of US$49,687. By comparison to 2013, that same employee could have excluded US$34,071.
Tax Return Must be Filed Or Benefits Can Be Lost
All taxpayers must remember that the exclusion benefits can be claimed only if a federal tax return is filed within certain time deadlines. Many Americans incorrectly think they do not need to file returns if their income is below the exclusion thresholds. They risk losing the benefits completely.
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