Limit on Excludable Amount:

If your tax home is in a foreign country and you meet the bona fide residency test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. You can also choose to exclude from your income a foreign housing amount. This is explained later under Foreign Housing Exclusion.

If you choose to exclude a foreign housing amount, you must calculate the foreign housing exclusion before you determine the foreign earned income exclusion. Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion.

If you choose to exclude foreign earned income, you can't deduct, exclude, or claim credit for any item that can be allocated to or charged against the excluded amounts. This includes any expenses, losses, and other normally deductible items allocable to the excluded income.  The table below shows the maximum amount excludable per individual, per tax year: 

The exclusion is limited to the smaller of the maximum excludable amount or the actual foreign earned income. For example, for tax year 2002, a taxpayer cannot exclude more than the lesser of:

1. $80,000, or

2. The foreign earned income for the tax year minus foreign housing exclusion

For married couples, if both the taxpayer and the spouse work abroad and they both meet either the bona fide residency test or the physical presence test, the taxpayer and spouse can each choose the foreign earned income exclusion (spouses do not both need to meet the same test). Together, you and your spouse can exclude as much as $160,000.

Housing Amount

Your housing amount is the total of your housing expenses for the year minus a base amount. The base amount is 16% of the annual salary of a GS –14, step 1, U.S. Government employee, figured on a daily basis, multiplied by the number of days during the year that you meet the bona fide residency test or the physical presence test. The annual salary is determined on January 1 of the year in which your tax year begins.

On January 1, 2001, the GS –14 salary was $65,983 per year; 16% of this amount comes to $10,557 or $28.92 per day. To figure your base amount if you are a calendar-year taxpayer, multiply $28.92 by the number of your qualifying days during 2001. Subtract the result from your total housing expenses for 2001 to find your housing amount.

Example: You qualify under the physical presence test for all of 2001. During the year, you spend $12,800 for your housing. Your housing amount is $12,800 minus $10,557, or $2,243.

Housing Expenses:

Housing expenses include your reasonable expenses paid or incurred for housing in a foreign country for you and (if they live with you) for your spouse and dependents. Consider only housing expenses for the part of the year that your tax home is in a foreign country and that you meet either the bona fide residency test or the physical presence test. Housing expenses include:

•   Rent

•   The fair rental value of housing provided in kind by your employer

•   Repairs

•   Utilities (other than telephone charges)

•   Real and personal property insurance

•   Nondeductible occupancy taxes

•   Nonrefundable fees for securing a leasehold

•   Rental of furniture and accessories

•   Residential parking

Foreign Housing Exclusion

If you do not have self-employment income, all of your earnings are employer-provided amounts and your entire housing amount is considered paid for with those employer-provided amounts. This means that you can exclude (up to the limits) your entire housing amount.

Employer-provided amounts include:

• Your salary

• Any reimbursement for housing expenses

• Amounts your employer pays to a third party on your behalf

• The fair rental value of company-owned housing furnished to you unless that value is excluded under the rules

• Amounts paid to you by your employer as part of a tax equalization plan

• Amounts paid to you or a third party by your employer for the education of your dependents.

Foreign Housing Deduction

If you do not have self-employment income, you can't take a foreign housing deduction. How you figure your housing deduction depends on whether you have only self-employment income or both self-employment income and employer-provided income. In either case, the amount you can deduct is subject to the limit explained below.

Self-employed — no employer-provided amounts:

If none of your housing amount is considered paid for with employer-provided amounts, such as when all of your income is from self-employment, you can deduct your housing amount, subject to the limit below, in figuring your adjusted gross income.

Self-employed and employer-provided amounts:

If you are both an employee and a self-employed individual during the year, you can deduct part of your housing amount and exclude part of it. To find the part that you can take as a housing exclusion, multiply your housing amount by the employer-provided amounts and then divide the result by your foreign earned income. The balance of the housing amount can be deducted, subject to the limit below.

Limit:

Your housing deduction cannot be more than your foreign earned income minus the total of:

1. Your foreign earned income exclusion, plus

2. Your housing exclusion

Can I claim the Exclusion or Deduction?

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Last modified: February 19, 2007