The foreign housing exclusion: two numbers people keep confusing

An exclusion for housing costs met out of employer-provided amounts, claimed alongside the foreign earned income exclusion. The IRS describes the housing amount as your foreign housing expenses for the year reduced by a base amount.

Because the rule limits the expenses that count and then assumes you would have paid for housing anyway. The first number is a ceiling on qualifying expenses. The second is a base the statute treats you as having spent, and it comes off before you exclude anything. Only what is left between them reaches your return.

Quoting the ceiling alone makes the relief look roughly twice as generous as it is.

That is the single error we correct most often on this topic.

So the order matters: cap the expenses first, subtract the base, then exclude the remainder.

In short, two numbers do two jobs. One decides how much of your rent the rule will look at, and the other decides how much of that it hands back.

Both are percentages of the earned income exclusion for the year. The base takes 16% of that cap and the standard ceiling on qualifying expenses takes 30%, so both move automatically whenever indexation lifts the cap. Our figures derive them rather than storing them, which is why they cannot drift apart.

The gap between the two is the most you can exclude on the standard limits.

High-cost locations follow a different ceiling, as the next section explains.

So the arithmetic is the same every year even though the numbers change.

Our foreign earned income exclusion service works from the published cap for the year in question, because a figure remembered from a previous year is the usual route to the wrong answer.

Many expensive cities do, and the IRS publishes the adjusted limits in a table with the Form 2555 instructions. The adjustment raises the ceiling on qualifying expenses for a named location, so more of a high rent counts before the base amount comes off.

The base amount does not change with location.

Check the current table rather than a figure quoted in an article, because the IRS revises both the list and the amounts.

So the location adjustment can matter a great deal, and it only ever moves one of the two numbers.

Reasonable housing costs you pay for yourself and your household abroad. Rent is the main one, along with utilities other than telephone, property insurance, residential parking, and rental repairs. The test is that the expense is reasonable and relates to housing.

Costs that improve the property are a different matter.

A property you buy, the furniture in it and anything lavish for the location all fall outside too.

In our practice the simplest check is whether the cost would disappear if you moved out.

Keep the evidence as you go. A tenancy agreement, the standing order for the rent and twelve utility bills take a minute a month to file and settle the question years later.

The capital items, mainly. Buying a home does not generate housing expenses for this purpose, and neither does improving one. Mortgage interest is a deduction question rather than a housing expense, and the cost of furniture and domestic help falls outside.

Telephone costs sit specifically outside the list.

So are expenses for a second household, except in narrow circumstances.

In short, this is relief for the cost of renting a roof rather than for the cost of owning one.

It depends on whose money paid the rent. The IRS draws the line clearly: the exclusion applies to amounts considered paid for with employer-provided amounts, and the deduction applies to amounts paid for with self-employment earnings. Employees take the first route and the self-employed take the second.

The arithmetic is identical either way.

What differs is where the relief lands on the return and what it can offset.

So the first question is simply where the income came from.

You can claim one without the other, and the choice is worth running both ways. Some people are better off claiming housing alone and using the foreign tax credit on the rest of the income, particularly where British tax is high.

You compute the housing figure the same way regardless.

Our guide to first-time filing from abroad works through that first-year decision.

So treat the two as separate levers rather than as a package.

However, revoking the earned income exclusion has consequences of its own. A revocation generally locks you out for five years unless the IRS consents, so the decision is not an annual free choice.

Both figures are time-apportioned. The IRS computes the base amount daily, as a fraction of the annual figure multiplied by the qualifying days that fall in your tax year. The earned income exclusion follows the same proration.

That matters most in the year you arrive.

Choosing the twelve-month window carefully can change both figures.

So a mid-year move is worth modeling rather than estimating.

So count the days before anything else. Both figures hang off that count, and an arrival date nobody checked is a surprisingly common reason for a claim to be wrong.

Yes, and the same tests govern both reliefs. You need a tax home abroad and either bona fide residence for an uninterrupted period including a whole tax year, or physical presence for 330 full days in a twelve-month period.

Housing relief does not have a softer entry route.

Our guide to the foreign earned income exclusion against the credit sets out when each is worth claiming.

So qualification comes first and the housing arithmetic follows.

It usually helps, because it makes the amounts employer-provided. An allowance or direct payment of rent by an employer is taxable income first, which is what then makes the exclusion available against it.

A reimbursement works the same way.

What does not work is treating an allowance as tax-free in itself.

So the allowance goes into income and the exclusion takes the housing cost back out.

Also check how your employer reports it. An allowance that never appears as income gives the exclusion nothing to work against, which is a payroll problem rather than a tax one.

A short sequence that keeps the two numbers apart.

The return is wrong and the correction costs more than getting it right. Overstating housing relief usually comes from using the ceiling as the excludable amount, which inflates the claim substantially.

Interest runs from the original due date on anything underpaid.

Our guide to amending a US return from abroad covers the correction route.

So the arithmetic is worth checking before filing rather than after.

Also keep the working. A claim you can reproduce two years later is far easier to defend than one that arrived as a single number from a spreadsheet nobody kept.

Not at all, and that is worth saying plainly. This is an American relief against American tax. Britain taxes employment income including housing allowances under its own rules, and no part of this calculation reaches a Self Assessment return.

Our UK Self Assessment service deals with that side.

The two returns interact through the credit position rather than through housing.

So a large housing exclusion can leave the British bill entirely unchanged.

In short, one return gets the relief and the other does not notice. That asymmetry is normal, and it is why the two returns have to be prepared in the right order rather than separately.

Consider an American on a London posting whose employer pays a housing allowance, with rent well above the standard ceiling for the year.

Her first adviser quoted the ceiling as the benefit. The real figure, after subtracting the base amount, came to roughly half that.

On the corrected numbers the exclusion still helped, but not enough to beat the foreign tax credit on the rest of her income, which changed what she claimed.

These figures are illustrative. The pattern is the one that matters: the right arithmetic changed the decision, not just the total.

The first treats the ceiling as the excludable amount, which roughly doubles the apparent relief.

The second forgets the base amount entirely, which produces the same error by a different route.

The third claims housing costs that do not qualify, usually purchased property, improvements or telephone bills.

The fourth claims the exclusion when the income was self-employment, where a deduction is the right mechanism.

We compute both figures from the current cap rather than from a remembered number, and show the working so anyone can check the claim.

We also run the exclusion against the credit before deciding, because for higher earners in Britain the credit often wins on the earned income even where housing relief is worth claiming.

Our US federal returns service covers the filing, and fees stay fixed and agreed in writing. How we work sets out the process.

If your rent is a serious share of your income, talk to us before the next return.