Foreign Housing Exclusion and Deduction

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Definition: Foreign Housing Exclusion and Deduction

Foreign housing exclusion and deduction is a US tax-exemption provision allowed by section 911 (a) of the federal tax code. While a person residing in the US has to pay tax for all the normal components of income, a person residing and working outside the US may qualify to exclude the cost of his/her housing from the gross income before application of any tax.

There is a subtle difference between ‘housing exclusion’ and ‘housing deduction’. Under housing exclusion, one can exclude the housing cost paid by himself/herself or by the employer on his/her behalf. However, under housing deduction, housing cost paid by self-employment earnings only qualify.

 

Criteria for qualification:

  1. The person must have filed a US federal income tax return, reporting income earned abroad.
  2. He/she person must be a US citizen or a resident alien (for federal taxation).
  3. The individual must possess a tax home in a foreign country.
  4. He/she must pass the bona fide residence test or the physical presence test.

 

Foreign housing cost amount (FHCA):

FHCA = Total foreign housing expenses (FHE) – Base housing amount (BHA),

where,

FHE = reasonable expenses actually paid by the individual for housing of himself/herself, his/her spouse and dependants in the taxable year,

BHA = 16% of the maximum foreign earned income exclusion (MFIE) for that year.


Example:

Say for year 2010, for a foreign working individual,

FHE = $50,000 and MFIE = $100,000.

Then, BHA = 16% of $100,000, i.e. $16,000.

Hence, FHCA = FHE – BHA = $(50,000 – 16,000) = $34,000.

This is the amount the individual can exclude from his gross income.

 

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