Foreign Housing Cost Exclusion or Deduction for 2023

The Foreign Housing Cost Exclusion or Deduction is a provision in the U.S. tax code that allows eligible taxpayers to exclude or deduct certain housing expenses incurred while living and working abroad. This provision is designed to help mitigate the financial burden of living in a foreign country, where housing costs can often be much higher than in the United States. 

The Foreign Housing Cost Exclusion applies to U.S. citizens or resident aliens who are living and working abroad and who meet certain eligibility criteria. To qualify, the taxpayer must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test.

• Under the bona fide residence test, the taxpayer must have lived in a foreign country for an uninterrupted period that includes an entire tax year. 
• Under the physical presence test, the taxpayer must have been physically present in a foreign country for at least 330 full days during a 12-month period.

Once a taxpayer qualifies for the Foreign Housing Cost Exclusion, they can exclude or deduct certain housing expenses from their taxable income.

These expenses include:

• Rent 
• Utilities (excluding telephone and internet)
• Reasonable expenses for furniture rental and household repairs
• Homeowner’s or renter’s insurance
• Property or leasing fees

However, the exclusion or deduction is subject to certain limitations, including a maximum allowable amount and a percentage of the taxpayer’s foreign-earned income. 

The standard limitation is comprised of two components: 

• A base housing amount
• A maximum housing amount

The base housing amount is determined by the IRS and reflects the minimum amount of housing expenses that are considered reasonable for the taxpayer’s foreign location. The maximum housing amount is a cap on the total amount of housing expenses that can be excluded from the taxpayer’s income.

The general limitation base housing amount is calculated using the following formula:

(16% of the maximum foreign earned income exclusion)

For 2023, the maximum foreign earned income exclusion determined by IRS is $120,000, so the base housing amount would be:

(16% x $120,000)= $19,200

The maximum housing amount is generally calculated as follows:

(30% of the maximum foreign earned income exclusion)

For 2023, the maximum housing amount would be:

(30% x $120,000)= $36,000

Some countries may have higher or lower limitations due to variations in the cost of living and other factors.

It is important to note that the Foreign Housing Cost Exclusion is separate from the Foreign Earned Income Exclusion, which allows eligible taxpayers to exclude up to a certain amount of their foreign-earned income from their taxable income. Taxpayers can claim both the Foreign Housing Cost Exclusion and the Foreign Earned Income Exclusion as long as they meet the eligibility criteria for both provisions.

In summary, the Foreign Housing Cost Exclusion or Deduction is a tax provision that allows eligible taxpayers to exclude or deduct certain housing expenses incurred while living and working abroad. To qualify, taxpayers must meet certain eligibility criteria, including the bona fide residence test or the physical presence test. The exclusion or deduction is subject to certain limitations, including a maximum allowable amount depending on the country you live in and a percentage of the taxpayer’s foreign-earned income.

If you have any questions about the Foreign Housing Cost Exclusion or Deduction, our team, or any global business issue, do not hesitate to reach out.