Overview

A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”.  Generally, the allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing.  The housing costs include those of the spouse and dependents if they lived with the taxpayer.  Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes.   Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still deduct the full amount permitted under the foreign housing exclusion rules.  This is not so.  To be eligible for exclusion, the taxpayer must actually incur these amounts in rental payments (for example, paid to the landlord on his behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).

Calculation Rules

To be eligible for exclusion from tax, the allowable housing expenses must exceed a so-called “base housing amount”.  The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2013, this “base housing amount” is US$15,616 (computed as follows: 16% x US$97,600 – the 2013 FEIE amount). Reasonable foreign housing expenses in excess of the ”base housing amount” are eligible for the exclusion, but such expenses are subject to a maximum ceiling which is generally 30 percent of the taxpayer’s foreign earned income exclusion.  For 2013 30% of the FEIE is  $29,280; computed by taking 30% of $97,600. Therefore, for 2013 many taxpayers may only exclude from income the difference between the $29,280 limitation and the $15,616 base housing amount, or $13,664.  This number will be higher for Americans employed and living in Dubai or Abu Dhabi where housing costs are greater, as discussed below.

2013 Geographic Housing Cost Allowances

The IRS was given authority to issue regulations or other guidance providing for the adjustment of this 30 percent maximum ceiling limitation based on geographic differences in housing costs relative to housing costs in the United States.  The IRS issued good news for those living in Dubai and Abu Dhabi.

In 2013, for those in Dubai, the IRS granted an adjustment of this 30 percent maximum ceiling limitation and increased it to a maximum of US$57,174. For those living in Abu Dhabi, the maximum ceiling is US$49,687.  See IRS Notice 2013-31

Using the newly announced numbers, an employee paying rent in Dubai can exclude from income the difference between the IRS announced limitation for Dubai (for 2013 this number is $57,174) and the $15,616 “base housing amount”. Using these figures, an employee residing in Dubai can exclude $41,558 of employer provided housing amounts from income provided that the amounts are actually used for that purpose. For employees living in Abu Dhabi, they can exclude US$34,071 of employer provided housing amounts (ceiling of US$49,687 minus $15,616 “base housing amount”).

Tax Return Must be Filed Or Benefits Can Be Lost

All taxpayers must remember that the exclusion benefits can be claimed only if a federal tax return is filed within certain time deadlines.  Many Americans incorrectly think they do not need to file returns if their income is below the exclusion thresholds. They risk losing the benefits completely. We can assist all Americans in preparing the US and, if applicable, State tax returns.