Foreign Income and Housing exclusion

The Foreign Earned Income Exclusion (FEIE) is a tax benefit that expats can use to exclude foreign income from U.S. taxation. Here’s how it works:

1. Eligibility:
   • To qualify, you must meet certain requirements:
     • Have foreign earned income.
     • Your tax home must be in a foreign country.
     • You must be one of the following:
       • A U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
       • A U.S. resident alien with an income tax treaty in effect and who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
       • A U.S. citizen or resident alien physically present in a foreign country for at least 330 full days during any 12 consecutive months.
       •  
   • If you live abroad, you’re generally taxed on your worldwide income, but the FEIE allows you to exclude a portion of your foreign earnings from U.S. taxation.

1. Exclusion Amount:
   • The maximum exclusion amount is adjusted annually for inflation.
   • For 2023, the exclusion limit is $120,000.
   • In 2024, it rises to $126,500.

1. Other Considerations:
   • Foreign earned income includes wages, salaries, and professional fees earned abroad.
   • It doesn’t include military or civilian pay from the U.S. government or services conducted in international waters or airspace.
   • Self-employed individuals can also claim the FEIE on foreign earned self-employment income.
   • You may be eligible for the foreign housing deduction instead of the housing exclusion if you’re self-employed.

Foreign Housing Exclusion-

The Foreign Housing Exclusion (FHE) is another tax provision that complements the Foreign Earned Income Exclusion (FEIE). Here’s what you need to know:

1. Eligibility:
   • To qualify for the FHE, you must meet the following criteria:
     • Your tax home must be in a foreign country.
     • You qualify under either the bona fide residence test or the physical presence test.
     • Most expats who qualify for the FEIE are also eligible for the FHE.
   • The FHE allows you to exclude certain housing expenses from your taxable income.
2. Computation:
   • Your foreign housing amount is calculated by subtracting the base housing amount from your total foreign housing expenses for the year.
   • The base housing amount is tied to the maximum foreign earned income exclusion and is 16% of that maximum amount divided by 365 (or 366 in a leap year).
   • Housing expenses include reasonable costs for housing in a foreign country for you, your spouse, and dependents.
   • However, it does not cover lavish or extravagant expenses, property purchases, furniture, or improvements that significantly increase property value.
3. Limitations:
   • The limit on housing expenses varies based on your location.
   • Your housing expenses cannot exceed your total foreign earned income for the taxable year.
   • If you choose the FHE, you must calculate it before the FEIE and cannot claim less than the full amount of housing exclusion you’re entitled to.
   • Note that once you exclude foreign housing amounts, you can’t take a foreign tax credit or deduction for taxes on income you’ve excluded.