Uncle Sam is not alien to the stress and predicament that comes with living and moving abroad. One cannot compare the cost of living, and in a bid not to discourage Americans who would like to move overseas, there are the provisions for expats to have some housing expense deduction from their reported gross income. It is called the Foreign Housing Allowance.
The value of the deduction varies based on your locations overseas. Before one can qualify for the allowance, one needs to spend enough time to pass the test of “physical presence" and "bona fide resident." In other words, one needs to live overseas. The exclusion for housing relates to individuals employed, while housing deduction relates to self-employed folks.
What is the Deductible Amount?
Without a doubt, this is the portion of your expense that can be deducted as a limitation. The Foreign Earned Income Exclusion's limits determine this value. When it comes to your housing allowance, there is a provision to deduct a maximum of 30% of the FEIE. Here are things one can exclude before reaching the deduction limit: water, rent, electricity, gas, vital house repairs, appliance rental, property insurance, etc. Things classified as "wants" – that are unnecessary – do not qualify. Examples are cable subscriptions. You cannot deduct a few other things: domestic labor (cooks, gardener), purchase of furniture, taxes, property depreciation, etc.
A lot of expenses can be easily classified as either need or want. When the classification is, however, not clear, one needs professional assistance.
Going Above the Deduction Limits
Some decades ago, Uncle Sam and Treasury made adjustments for some locations because of the massive discrepancy in the living cost from what is available in America. From that, Uncle Sam has passed more than 400 locations as exceptions to the maximum deduction capped at 30%. This has also widened the maximum deduction limit for expats in such places.
A few examples are Hong Kong: $114,300; London: $83,400. Singapore: $67,000.
The Deduction Amount and Your Situation
With a foundation of what housing allowance entails, it is essential to know how much you can deduct. The first step is to consider how much you cannot deduct – this, most times, is the amount that you will pay to Uncle Sam if on US soil. The current value of this non-deductible amount is placed at 16% of the value of FEIE, and the calculation is similar for all, irrespective of the location.
An FEIE value placed at 92,500 USD has the current non-deductible amount at 14,640 USD. One needs to estimate this value in days since the days you were in America is not involved. For someone in Singapore with a current allowance at 67,000 USD (183.56 USD each day), if you used 350 days outside the US, your deductible amount will be ($183.56 - $40.11) * 350 giving $50,207.5.
We know that an idea of the exact value of what you can deduct does not automatically translate to what you have to deduct. Be sure to involve the help of a professional. Also, employed individuals can deduct education and child care expenses alongside tax equalization paid by the employer.
Housing Deduction for Self Employed
Self-employed expats do not merit the foreign housing exclusion. However, they can utilize the advantage of foreign housing deduction by deducting qualified housing expenses from the value of their income (gross income).
Taxpayers should note that the Foreign Housing Deduction will bring down the entire tax liability. It, however, will not bring down the tax burden of a self-employed individual.
Income Exclusion or Housing Allowance
As discussed above, one cannot claim both incomes alongside the FEIE with the Housing Allowance. Also, be sure to contact a tax professional.
Method of Claiming Housing Allowance
The foreign Housing allowance is voluntary even if you go by deduction or exclusion. Your ability to claim this deduction depends on you filling Form 2555 alongside the federal tax return.
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