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What Is the Foreign Housing Exclusion?

Do you want to know about FHE or Foreign Housing Exclusion? Then, you have come to the correct place at USTAXFiling.in. In this post, we will discuss FHE in more detail. Stay tuned and continue to read the article till last to know everything about FHE at USTAXFiling.in.

The FHE or Foreign Housing Exclusion, at times referred to as the FHD or Foreign Housing deduction or FHA (Foreign Housing Allowance), is a lesser-known cash saver that will assist in limiting the liability of taxes for ex-pats. With the correct preparation and a little insight, this exclusion may increase the affordability of staying abroad. If you are planning on using the FEIE (Foreign Earned Income Exclusion), too, this deduction needs no additional paperwork. You must learn what expats must understand to save cash with FHD (Foreign housing deduction) and FHE (Foreign Housing Exclusion) with Form 2555.

Key Takeaways

Many expats who become eligible for the FEIE or Foreign Earned Income Exclusion are also eligible for the FHE (Foreign Housing Exclusion)
The FHE (Foreign Housing Exclusion) allows Americans to deduct specific foreign housing costs from their taxable income.
To claim the FHE, you should file IRS 2555 form.

What Is the Foreign Housing Exclusion Exactly?

The FHE (Foreign Housing Exclusion) reduces the liability of taxes for ex-pats by letting specific housing costs be deducted from taxable income. The IRS (Internal Revenue Service) built it to offset the cost that goes hand-in-hand with staying abroad.

It includes utilities, repairs, and rent but does not include phone, cable or servant expenses, or domestic helper. The FHE (Foreign Housing Exclusion) is used for several costs related to housing that is not paid using an employer in the US. It also includes small repairs, property insurance you make that you are not reimbursed for, and parking amounts near your locality or house.

How Do You Qualify for the Foreign Housing Exclusion?

The first thing to become eligible for the FHE (Foreign Housing Exclusion) is to become eligible for the FEIE. To become eligible for the FEIE, you have to either pass the bona fide resident test or the physical presence test.

The Bona fide residence test is passed only by being in your resident country for an uninterrupted calendar year (1st January to 31st December)
The PPT (Physical Presence test) is passed by being present physically for complete 330 days for 12 consecutive months. You must note that even 60 seconds spent in the United States counts as a complete day in the United States, and there are no exceptions if you are in the United States for 35 days. The 330 days are not at all consecutive, which means that those new to the lifestyle of expats or those who moved midyear may pass the test more quickly.

Also, your housing expenses should be greater than 16 percent of the FEIE for the given financial year to order to use the FHE (Foreign Housing Exclusion)

What Is the Foreign Housing Deduction?

When you stay overseas, you become eligible for the FHE (Foreign Housing Exclusion) and FHD (Foreign Housing Deduction). The FHD depends on actual housing costs overseas up to 30 percent of the FEIE (Foreign Earned Income Exclusion) minus base housing costs of 16 percent of the FEIE. The calculation considers the maximum amount you might exclude from your taxable income using the FHE, which is equal to 14 percent of the FEIE.

For the financial year 2022, which is reported in 2023, the standard housing exclusion is $15700, While for the taxable year for 2023, which is reported in 2024, the standard exclusion will increase to $17000. These expenses might assist you in decreasing your liability of taxes and keeping more of your foreign amount.

How to Calculate Your Foreign Housing Deduction

In order to calculate your FHD (Foreign Housing Deduction) or exclusion, first, you may tally your eligible costs. You must remember that, to use the exclusion, your qualifying housing expenses should exceed more than 16 percent of the FEIE amount for the particular financial year. The amount is determined on the basis of the housing expenses for staying in the United States.

As long as your qualifying costs exceed the base housing expenses, you may deduct or exclude the total amount of your qualifying costs up to the maximum amount permitted for the financial year.

If you stay in a city that is known by the IRS as “ultra-high cost,” you can use an extra amount for the FHE (Foreign Housing Exclusion). The recent list is included in the instructions of the IRS for the 2555 form completion. There is a different amount for each city, so be assured that you check with your location. If your place is not listed, then you might use the standard amount.

What Are Qualified Housing Expenses?

Utilities and rent are necessary expenses, as are household repairs, parking, personal property insurance, real estate insurance, accessory rentals, and furniture. You must note that furniture purchase or another housing cost might not become eligible for the FHD, nor the domestic labor or mortgage payments. Eligible housing costs are reported on the 2555 form along with FEIE or Foreign earned income exclusion. Non-qualifying housing expenses or qualified housing expenses, rent mortgage payments, and utilities except for TV services, telephone, and internet, maids, domestic labor, and housekeepers. Leasing charges anything deemed extravagant or lavish. Personal property furniture and personal property insurance such as renter’s insurance or homeowner’s insurance, parking rental, and repairs.

How to Claim the Foreign Housing Exclusion

Once you finalize that you are eligible for the Foreign Earned Income Exclusion or FEIE, you have to elect it through Form 2555. If you are self-employed, you can use the FHD (Foreign Housing Deduction). As the name suggests, the tax benefit version works as a deduction rather than an exclusion.

It means that you don’t combine your housing expenses with your FEIE (Foreign Earned Income Exclusion). You have to report your housing expenses on form 1040 (36 lines, in the adjustment section, to be specific)

Is it Beneficial for a Wife and Husband to Split the Foreign Housing Exclusion?

When it comes to FHE (Foreign Housing Exclusion), married people regularly think if they may claim both of them. Unfortunately, if you or your partner stay in the same house, you cannot do it. You get the choice to file either separate returns with only one of you reporting the FHE or file a joint income tax return with one FHE claim.

Also, if you and your partner stay in separate houses, there is a chance for both of you to report the FHE (Foreign Housing Exclusion). Every partner may separately file claims for their household. You must keep in mind that your household cannot be within commuting distance of one another.

It is necessary to remember that you may file jointly with one FHE claim might offer several benefits, so filing separate income tax returns with individual FHE (Foreign Housing Exclusions) is not always guaranteed to be a better choice. It is vital to evaluate your particular case and take professional tax help to consider the best approach for you and your partner to optimize your tax scenario.

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