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ExPat CPA compares the Foreign Housing Deduction and Foreign Housing Exclusion on Form 2555 | IRS Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad

IRS Form 2555

Sometimes new tax Clients didn’t take advantage of the foreign housing section of Form 2555 in prior tax years. You can amend those back returns if they generate refunds.

IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad and Form 2555, Foreign Earned Income.

Hello, I’m Gary Bode, an expat CPA with a virtual office for international clients. Most questions I hear about Form 2555, Foreign Earned Income, concern the Foreign Housing Deduction and Foreign Housing Exclusion. So here are the basics of the foreign housing deduction. Most Clients say the Form 2555 instructions and IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, are hard to read.

Similarities of the Foreign Housing Exclusion and Foreign Housing Deduction

To qualify for the foreign housing exclusion or deduction, you must:

  • Be a U.S. citizen or resident alien (for federal tax purposes).
  • Have foreign earned income (income received for working in a foreign country).
  • Have a tax home in a foreign country.
  • Meet either the bona fide residence test or the physical presence test. We don’t cover test parameters in this post.
  • Have paid (or incurred) foreign housing expenses. These are described below.
  • Both are reported on Form 2555, Foreign Earned Income, the most common expat IRS document.

The maximum exclusion and deduction amounts for 2013 is $15,616, but can be limited by multiple constraints on Form 2555.

Differences between the Foreign Housing Exclusion and Foreign Housing Deduction

Self-employed folks must use the Foreign Housing Deduction. Self-employed folks can’t use the exclusion. While similar, the exclusion and deduction require different tax treatment. There is a distinction between employed and self-employed; see below.

What is Self Employment Income?

Self-employed folks include:

  • Sole Proprietors. You run your own business and file Schedule C with Form 1040 as the company’s tax return. You are self-employed, even if your company pays you as an employee and files US payroll tax Form 941.
  • Single Member LLCs, again filing Schedule C as above.
  • Partners in a Partnership.

Sources of Information on the foreign house exclusion and foreign housing deduction

  • Form 2555 instructions.
  • IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
  • Tax research software. Maybe your local University subscribes to one?
  • The IRS website.

Tax Mechanics of Form 2555 and the Foreign Housing Deduction

The housing deduction is calculated on Form 2555 Part VI and IX. The deduction flows to Line 36 on Form 1040. Print “Form 2555” on the dotted lines next to the line.

Form 2555 EZ or Form 2555

I think most expat CPAs file form 2555, even if the client qualifies to file Form 2555 EZ.

Qualifying Expenses for the Foreign Housing Deduction

The following expenses qualify for the foreign housing exclusion:

  • Rent.
  • Repairs.
  • Utilities, but not telephone expense.
  • Real property and personal property insurance (homeowners & renters insurance).
  • Occupancy taxes.
  • Nonrefundable security deposits or lease payments.
  • Furniture rental.
  • Residential parking fees.

I’m an Expat CPA who prepares:

  • Form 2555
  • Form 5471
  • Form 1116
  • Form 3520
  • FBAR

Our virtual office makes tax time easy and secure for our international clients. We have hundreds of postings on this site, many on expat issues, to help you eval our experience and attitude. For a free initial phone consult, call (910) 399-2705.

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