Foreign Housing Exclusion - Limitations

Limitations

Sections 911(c)(2)(A)(i) and 911(c)(2)(A)(ii) of the federal tax code limits the housing expenses eligible for the housing exclusion to 30% of the maximum foreign earned income exclusion. The result is then multiplied by the number of days in the qualifying period that fall within the tax year. For 2010, if the maximum foreign earned income exclusion is $91,500, eligible housing expenses for the year would be limited to $27,450 (30% of $91,500). However, qualified individuals living in high-cost neighborhoods are able to deduct more than the standard limit of $27,450 in 2010 but not more than the limits outlined in the Instructions for Form 2555.

In defining the base amount, section 911(c)(1)(B)(iii) of the federal tax code states that the amount is equal to 16% of the maximum foreign earned income exclusion multiplied by the number of qualifying days within the tax year. Once again, if the maximum foreign earned income exclusion for the 2010 tax year is $91,500, the base amount would be limited to $14,640 (16% of $91,500) for the year.

To illustrate, let’s assume that an architect qualifies for the foreign earned income exclusion under the physical presence test with a qualifying period that includes all of 2010. He makes $69,000 through wages and had $18,000 in housing expenses. In determining the housing amount for the foreign housing exclusion, the housing expenses would meet the $27,450 limit for the year. However, $14,640 must be reduced from the $18,000 in order to arrive at the housing amount of $3,360 that is eligible for the foreign housing exclusion.