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.
New guidance from the Treasury Department and IRS gives U.S. expats living in high-cost areas abroad a higher exclusion for their housing expenses. This will decrease U.S. tax liabilities for expats in areas from Buenos Aires to Moscow to Tokyo.
Foreign housing costs
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 IRC §911. 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 2020, the floor is therefore $17,216 ($107,600 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 2020, the ceiling on excludable housing costs is $32,280 ($107,600 exclusion × 30%).
Putting the two concepts together, the maximum housing cost an eligible individual may exclude from income in 2020 is $15,064 ($32,280 ceiling - $17,216 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 2020-13 provides a Table of Adjusted Limitations for high housing cost areas for 2020. For example, the ceiling in Guatemala City is $42,000, so the maximum excludable housing cost is $24,784 ($42,000 - $17,216).
Taxpayers in high-cost locations during 2019 may elect to apply the limitations set forth in the 2020 Table of Adjusted Limitations instead of the 2019 table in Notice 2019-24.
The How to Use High-Cost Table for §911 Housing Costs Quick Reference Card explains how to apply the Table of Limitations for 2020.