Foreign Earned Income Exclusion – Housing Costs

The foreign earned income exclusion allows for Americans living and working abroad to exclude earned income, up to $107,600/person for 2020.  To be eligible for the exclusion, taxpayers must have their main abode outside the U.S. and meet either the bona fide residence test or the physical presence test.  In addition to excluding earned income, taxpayers can also deduct certain housing costs not reimbursed by the employer.

The exact calculation of deductible housing costs can get a bit complicated.  First, it is tied to the amount of the overall exclusion, which is indexed for inflation and changes every year.  Next, there is a base minimum amount that is expected to be paid, meaning that your costs must be above this amount to qualify.  Lastly, there is also a maximum of eligible costs based on geographic location.

While it may be complex, every little bit helps when it comes to tax savings.  Taking advantage of the foreign earned income exclusion can offer a good planning tool, especially for married couples with small businesses or business owners.  International tax can cause many headaches and a lot of reporting, but this exclusion is definitely a benefit.

For further information and new updates to the law, see here.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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