The housing exclusion is a tax benefit available to U.S. taxpayers who live and work abroad and qualify under either the bona fide residence test or the physical presence test. It allows taxpayers to exclude a portion of their foreign housing expenses from gross income, reducing their taxable income. This exclusion applies only to housing expenses paid for with employer-provided amounts, such as wages, salaries, or reimbursements for housing costs. The amount excluded is limited to a percentage of the maximum foreign earned income exclusion and is based on the number of days in the taxpayer’s qualifying period during the tax year.
Key Rules and Requirements
- Eligibility: Taxpayers must have a tax home in a foreign country and meet either the bona fide residence or physical presence test.
- Employer-Provided Amounts: The housing exclusion applies only to expenses paid for with employer-provided amounts. If all foreign earned income is self-employment income, the housing deduction (not the exclusion) applies.
- Base Housing Amount: The base housing amount is calculated as 16% of the maximum foreign earned income exclusion for the tax year, multiplied by the number of qualifying days in the tax year.
- Married Couples: If spouses live in separate foreign households and their tax homes are not within a reasonable commuting distance, each may claim their own housing exclusion. Otherwise, only one spouse may claim it.
- Second Foreign Household: If a taxpayer maintains a second foreign household for spouse or dependents due to dangerous or adverse living conditions at the primary tax home, those expenses may be included on Form 2555, line 28.
Reporting and Documentation
- Taxpayers claiming the housing exclusion must file Form 2555 with their federal income tax return (Form 1040, 1040-SR, or 1040-X).
- On Form 2555, Part VI provides instructions for claiming the housing exclusion. Line 28 requires entry of total reasonable housing expenses, while Line 31 requires the number of qualifying days in the tax year.
- Line 34 requires reporting any employer-provided amounts included in gross income that relate to foreign housing expenses.
Source:
Publication 54 (2025)
Form 2555 (2025)
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.