The Foreign Earned Income Exclusion and the Foreign Housing Exclusion/Deduction

ExpatBob writes: I wrote this for part of my book but I figured it’s stuff that everyone ought to know so… enjoy!

The Foreign Earned Income Exclusion, or FEIE, is a benefit which excludes an amount from your taxable gross income. At the time of writing, for 2013, it gives you an exemption of $97,600.00 per person, provided that you meet certain requirements. And, in addition (yes, there is actually an “in addition”) you can also exclude or deduct certain amounts for the Foreign Housing Exclusion (FHE).

The FEIE is applied based on days abroad, so the total amount is divided by 365 and then multiplied by the number of days you were gone. So, for tax year 2013, $267.40 per person, per day, of your gross income can be tax-exempt by simply living in a foreign country.

According to the IRS website, you qualify for the FEIE if you are:

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

And, for that “in addition” part about housing, you may also deduct many of your housing expenses. Whether you may exclude or deduct depends on whether or not you are self-employed; the difference between exclusion (making a portion nontaxable) and deduction (removing from taxable income) is fuzzy at best, and it’s magical mystery voodoo best left to your accountant.

The basics, in the IRS’ own words: “Housing expenses include your reasonable expenses actually paid or incurred for housing in a foreign country for you and (if they lived with you) for your spouse and dependents. Housing expenses do not include expenses that are lavish or extravagant under the circumstances, the cost of buying property, purchased furniture or accessories, and improvements and other expenses that increase the value or appreciably prolong the life of your property.”

This means, in plain English, that you may deduct the following from your gross income:

• If housing is provided by your employer, its fair rental value.
• Rent.
• Utility bills, with exception to telephone.
• Cost of any repairs.
• Property or renter’s insurance.
• Any nonrefundable fees for securing leasehold.
• Any nondeductible occupancy taxes.
• Parking fees.
• Furniture and appliance rental.

And, in addition to that, if, for example, you are working overseas while your family remains back home, you may also apply the second household’s similar expenses to the FHE.

Real estate investment tax advantage:

If you are an employee of your own business, and that business purchases a property abroad and houses you in it, you may then use the FHE to deduct its fair market rental value and general upkeep from your personal gross income.

The business may also write off the purchase as a legitimate expense, and may also be able to write off its depreciation and other expenses that do not fall under the personal FHE. What a deal!

Corporate stipend tax advantage:

Your employer may issue a tax-deductible, per-diem stipend to you, the employee, to help with the pains of living abroad. This may or may not be tax-advantageous depending on the circumstances but may help to pad up your FEIE if you do not earn $97k by taking it from the business and putting it under your income.

Further information can be found on the IRS website (http://www.irs.gov) and the FEIE and FHE may be filed in your tax return using Form 2555.