Foreign Earned Income & Housing Exclusion
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $104,100 of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.
If both you and your spouse work abroad and each of you meet the requirements for the foreign earned income and housing exclusions, you and your spouse can exclude as much as $208,200 if filing a joint return.
To claim the foreign earned income and housing exclusion, you must meet all three of the following requirements.
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- You must be one of the following.
- 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. 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.
Below is a graphic provided by the IRS to help you determine if you qualify for the exclusions.
Bona Fide Residence Test
You meet the bona fide residence test if you are a resident in good faith of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the exclusions only if you are either:
- A U.S. citizen, or
- 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.
You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test.
Bona fide residence is determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad.
The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on your tax return.
Statement to foreign authorities. You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities:
- Hold that you are not subject to their income tax laws as a resident, or
- Have not made a final decision on your status.
Physical Presence Test
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. Any U.S. citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction.
The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad.
330 full days. Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation.
You do not meet the physical presence test if illness, family problems, a vacation, or your employer’s orders cause you to be present for less than the required amount of time.
Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.
You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.
“Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties.
Foreign Earned Income
Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements.
- Your tax home is in a foreign country.
- You meet either the bona fide residence test or the physical presence test.
Earned income is pay for personal services performed, such as wages, salaries, or professional fees. The list that follows classifies many types of income into three categories. The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both.
|Salaries and wages
|Scholarships and fellowships
|Social security benefits
Foreign Housing Exclusion or Deduction
In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing expenses if your tax home is in a foreign country.
The housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year. The housing deduction applies only to amounts paid for with self-employment earnings.
Housing expenses include your reasonable expenses actually paid or incurred for housing in a foreign country for you, your spouse and your dependents. Housing expenses do not include expenses that are lavish or extravagant under the circumstances.
Housing expenses include:
- The fair rental value of housing provided in kind by your employer,
- Utilities (other than telephone charges),
- Real and personal property insurance,
- Nondeductible occupancy taxes,
- Nonrefundable fees for securing a leasehold,
- Rental of furniture and accessories, and
- Residential parking.
Housing expenses do not include:
- Expenses that are lavish or extravagant under the circumstances,
- Deductible interest and taxes
- The cost of buying property, including principal payments on a mortgage,
- The cost of domestic labor (maids, gardeners, etc.),
- Pay television subscriptions,
- Improvements and other expenses that increase the value or appreciably prolong the life of property,
- Purchased furniture or accessories, or
- Depreciation or amortization of property or improvements.
Your housing cost is the total of your housing expenses for the year minus a base housing amount provided by the IRS.
Base housing amount
The base housing amount is 16% of the foreign earned income exclusion allowed (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year.
For 2017, the maximum foreign earned income exclusion is $102,100 per year;
- 16% of this amount is $15,336, or $44.76 per day.
- To figure your base housing amount, multiply $44.76 by the number of your qualifying days during 2017.
- Subtract the result from your total housing expenses (up to the applicable limit) to find your housing amount.
Your qualifying period includes all of 2017. During the year, you spent $18,836 for your housing. Your housing amount is $18,836 minus $16,336, or $2,500.
Limit on Housing Costs
Also, for purposes of determining the foreign housing exclusion or deduction, your housing expenses eligible to be considered in calculating the housing cost amount may not exceed a certain limit. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, multiplied by the number of days in your qualifying period that fall within your tax year. For 2017, this is generally $83.92 per day ($30,630 per year). However, the limit will vary- depending upon the location of your foreign tax home.
An individual incurring housing expenses in a high-cost locality during 2017 can use housing expenses that total more than the standard limit on housing expenses ($30,630) to determine the housing amount. An individual who does not incur housing expenses in a high-cost locality is limited to maximum housing expenses of $83.92 per day ($30,630 per year).
The following table shows the limits on housing expenses based on your location. If your location is not listed on the table, the limit is for your housing expenses is $30,630.