In addition to the foreign earned income exclusion, taxpayers may also claim an exclusion or a deduction from gross income for an expenditure for housing if the home of the tax is in a foreign country and they qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.
The housing exclusion applies only to amounts which are treated as paid by an employer, which includes any amounts paid to a taxpayer or paid or incurred on a taxpayer’s behalf by his or her employer that are taxable foreign earned income for the year. In contrast, the housing deduction applies only to amounts paid for with earnings from self-employment. Thus, the source of the amounts paid typically determine use of the deduction or exclusion.
The housing amount is the total of housing expenses for the year less the base housing amount. The computation of the base housing amount 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 the qualifying period that fall within the applicable tax year.
Housing expenses include reasonable expenses actually paid or incurred for housing in a foreign country for a taxpayer and his or her spouse and dependents, as long as they co-reside with the taxpayer. Housing expenses may only be considered for the part of the year in which a taxpayer qualifies for the foreign earned income exclusion.
Housing expenses do not include extravagant expenses or those expenses that help the property appreciate in value.
Also, for purposes of determining the foreign housing exclusion or deduction, those housing expenses eligible for consideration in the calculation of the housing cost amount may not exceed a certain threshold. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which the housing expenses were incurred.
Foreign housing expenses may not exceed total foreign earned income for the taxable year. The foreign housing deduction may not exceed foreign earned income less the total of (1) the foreign earned income exclusion, plus (2) the housing exclusion. Both the foreign housing exclusion or deduction reduce regular income tax, but not self-employment tax.
If you have self-employment income, it may be appropriate to use the foreign housing deduction, while any housing expenses paid by an employer may necessitate use of the foreign housing exclusion. If you have any questions about taxes, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
