The foreign earned income exclusion is voluntary. You can choose the foreign earned income exclusion and/or the foreign housing exclusion by completing the appropriate parts of Form 2555.
Can I use both foreign income exclusion and Foreign Tax Credit?
While you cannot take the Foreign Earned Income Exclusion and Foreign Tax Credit on the same dollar of income, you can take both in the same year. You could use the Foreign Earned Income Exclusion to shield the first $107,600 (2020 figure) from U.S. taxation.
How does the foreign housing exclusion work for expats?
The IRS view the base housing amount (16% of the foreign earned income exclusion) to be what an individual would be paying for housing in the US, so US expats are only able to claim any extra housing benefits on top of this amount. In the Dubai example, the actual housing expenses for this individual are below the limit for that city of $57,000.
Is there a limit to the foreign housing deduction?
Your foreign housing deduction cannot be more than your foreign earned income less the total of your (1) foreign earned income exclusion, plus (2) your housing exclusion. Although the foreign housing exclusion and/or the deduction will reduce your regular income tax, they will not reduce your self-employment tax.
What do you need to know about foreign housing expenses?
Housing expenses include 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. Consider only housing expenses for the part of the year that you qualify for the foreign earned income exclusion.
How does the foreign earned income exclusion work?
In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.
