u.s. expat tax guide – india
2024 Foreign Housing Exclusion for US Expats in India
For US expats living in India, especially in cities with a high cost of living, the Foreign Housing Exclusion can help reduce US tax liability by allowing you to exclude certain housing expenses.ย
This exclusion is particularly helpful for US expats living in cities like Mumbai, where the cost of living is high, including rent and utilities.
What is the Foreign Housing Exclusion and how does it work?
The Foreign Housing Exclusion allows you to exclude specific housing expenses from your taxable income. This exclusion works alongside the Foreign Earned Income Exclusion (FEIE) to help reduce the amount of foreign income subject to US taxes.ย
Qualifying housing expenses include rent, utilities, and other reasonable costs, but luxury items are not covered.
The amount you can exclude depends on your housing expenses and a base amount set by the IRS. The exclusion is calculated as the lesser of your actual housing expenses or the limit set for your location.
How does the foreign housing exclusion apply to expensive cities like Mumbai?
For example, if you live in Mumbai, where the cost of rent and utilities is high, and in 2024 you pay US$35,000 for these expenses, you can use the Foreign Housing Exclusion to reduce your taxable income.ย
The IRS sets a housing expense limit for each location, and for Mumbai, this limit might be US$68,000. You can exclude the lesser of the two amountsโhere, it would be US$35,000.
However, before claiming this exclusion, you must subtract a base amount set by the IRS, which is 16% of the Foreign Earned Income Exclusion limit.ย
For 2024, this base amount is US$20,240 (16% of US$126,500). In this example, you would subtract US$20,240 from your US$35,000 in housing expenses, leaving you with US$14,760 that can be claimed as a housing exclusion.
How can the foreign housing exclusion help reduce overall tax liability?
The Foreign Housing Exclusion can significantly lower the amount of income subject to US taxation. For example, if your total earned income is US$150,000, you could use the FEIE to exclude US$126,500.ย
After that, you can use the Foreign Housing Exclusion to deduct an additional US$14,760 from your taxable income. This combination may leave you with very little taxable income and, consequently, a reduced US tax liability.
Can I use the Foreign Tax Credit along with the foreign housing exclusion?
Yes, you can use the Foreign Tax Credit (FTC) along with the Foreign Housing Exclusion and FEIE, but not on the same income. For instance, if you use the FEIE to exclude US$126,500 of your earned income, and then use the Foreign Housing Exclusion for additional expenses, any remaining income can be offset with the FTC for taxes paid in India.ย
This combination helps minimize the risk of double taxation, often leading to minimal or zero US tax liability.
What are the common misconceptions about the foreign housing exclusion?
A common misconception is that you can exclude all of your housing expenses without any limitations. In reality, the IRS sets specific limits for each location, and you must also reduce your expenses by the base amount.
You can take a look at the limits on the official IRS table.ย
Additionally, some expats believe they must choose between the FEIE, FTC, and Foreign Housing Exclusion. In fact, you can use all three together to maximize your tax benefits.
How can US expats take advantage of the Foreign Housing Exclusion?
To take advantage of the foreign housing exclusion, it is essential to maintain accurate records of all housing-related expenses. Keep receipts for rent, utilities, and any other qualifying expenses.ย
When filing your US tax return, you will need to complete Form 2555 to claim the exclusion.
It is highly recommended to work with a tax professional who understands both US and Indian tax laws. They can help you navigate the complexities of the Foreign Housing Exclusion, FEIE, and FTC, ensuring you get the most benefits while staying compliant with US tax regulations.
For US expats in India, the foreign housing exclusion is a valuable tool that can help offset the high cost of living and reduce overall tax liability.ย
By understanding how to use this exclusion alongside other tax benefits, expats can make the most of their earnings while minimizing double taxation.