Foreign housing expense adjustments for high-cost areas
Higher foreign housing expense ceilings for those who live and work in high-cost areas abroad let them exclude a larger portion of housing expenses.
Updated guidance from the Treasury Department and IRS gives U.S. citizens and residents living in high-cost areas abroad a higher exclusion for their foreign housing expenses.
Notice 2021-18 provides adjustments to the limitation on housing expenses for purposes of the §911 housing cost exclusion for specific locations in 2021.
Foreign housing costs for Form 2555
U.S. citizens and residents who live and work abroad are eligible to exclude portions of their foreign earned income and housing costs on their U.S. tax returns under §911. Form 2555, Foreign Earned Income, contains the housing exclusion.
To calculate the foreign housing exclusion amount, the taxpayer needs to consider both a “floor” and a “ceiling.” The excludable amount is the amount by which the housing expenses (up to the ceiling) exceed the base housing amount (floor).
The floor, also called the “base housing amount,” is 16% of the maximum foreign earned income exclusion for the year.
For tax year 2021, the floor is therefore $17,392 ($108,700 exclusion × 16%).
Only housing costs in excess of this base amount are excludable. A taxpayer with qualified housing expenses equal to or less than the amount may not exclude any of the housing costs.
The ceiling (upper threshold) on excludable housing costs is 30% of the maximum foreign earned income exclusion for the year.
For tax year 2021, the ceiling on excludable housing costs is $32,610 ($108,700 exclusion × 30%).
Putting the two concepts together, the maximum housing cost an eligible individual may exclude from income in 2021 is $15,218 ($32,610 ceiling - $17,392 floor).
Adjustments to the “ceiling”
The Secretary is authorized to adjust the ceiling based on geographic differences in housing costs relative to the U.S. Notice 2021-18 provides a Table of Adjusted Limitations for high housing cost areas for 2021.
For example, the ceiling in Guatemala City is $42,000, so the maximum excludable housing cost is $24,608 ($42,000 - $17,392).
Taxpayers in high-cost locations during 2020 may elect to apply the limitations (i.e. substitute the high-cost area ceilings) set forth in the 2021 Table of Adjusted Limitations instead of the 2020 table in Notice 2020-13.
The How to Use High-Cost Table for §911 Housing Costs Quick Reference Card explains how to apply the Table of Limitations.