How the Foreign Housing Allowance Works

The Foreign Housing Allowance is a tax benefit available to U.S. citizens and residents who live and work in a foreign country. Its purpose is to provide financial relief for the substantial costs of maintaining a household abroad. This benefit allows qualifying individuals to exclude a portion of their foreign-earned income that is used for housing expenses from their U.S. income taxes.

Eligibility for the Foreign Housing Allowance

To qualify for the foreign housing allowance, an individual must have their “tax home” in a foreign country. A tax home is generally the area of your main place of employment or business, regardless of where you maintain your family home. If your work assignment abroad is expected to last for more than one year, your tax home is considered to be in that foreign country.

You must also satisfy one of two additional tests: the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test requires that you are a resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). This test is based on your intentions and the nature of your stay, implying you have established a home in the foreign country.

To meet the Physical Presence Test, you must be physically present in one or more foreign countries for at least 330 full days during any consecutive 12-month period. A full day is a continuous 24-hour period. This test is often used by individuals on temporary assignments or those who may not have established permanent residency but spend a significant amount of time working overseas.

Qualified Foreign Housing Expenses

The Internal Revenue Service (IRS) defines qualified expenses as reasonable costs paid or incurred for housing in a foreign country for you, your spouse, and your dependents. Included expenses cover the costs of your residence, such as:

• Rent paid for your property
• The fair rental value of employer-provided housing if it’s included in your income
• Utilities such as electricity and water
• Real and personal property insurance
• Nonrefundable fees paid to secure a lease
• Rental of furniture and accessories
• Residential parking fees
• Minor household repairs

Certain expenditures are disallowed and cannot be counted toward your housing expenses, including:

• Costs of purchasing a property, such as mortgage principal payments
• The cost of buying furniture or accessories
• Expenses deemed lavish or extravagant under the circumstances
• Costs for domestic labor like maids or gardeners

Calculating the Housing Exclusion or Deduction

The starting point for the calculation is your total of qualified foreign housing expenses for the year. From this total, you must subtract a “base housing amount,” which represents the housing costs the government assumes you would have incurred regardless of location.

The base housing amount is calculated as 16% of the maximum Foreign Earned Income Exclusion (FEIE) for that tax year. For the 2025 tax year, the FEIE is $130,000, making the base housing amount $20,800 annually. This base amount must be prorated if you do not qualify for the full tax year.

After subtracting the base amount from your total qualified expenses, the result is your potential housing exclusion. However, this amount is subject to an overall limit. Generally, the limit is 30% of the maximum FEIE, which for 2025 is $39,000, though the IRS provides higher limits for specific high-cost cities. Your final exclusion is the lesser of your calculated housing amount or the specific limit for your location.

For example, if your qualified housing expenses in 2025 are $34,000, you would subtract the base amount of $20,800, leaving $13,200. Assuming your location’s limit is at least $39,000, your housing exclusion would be $13,200. This benefit is an “exclusion” for employees and a “deduction” for self-employed individuals, though the calculation is similar.

How to Claim the Foreign Housing Allowance

To claim the foreign housing allowance, you must complete and file IRS Form 2555, Foreign Earned Income. You will need to gather information, including:

• Your full foreign address
• Details about your time abroad to prove you meet the residency or presence tests
• Your employer’s information
• A detailed list of your qualified housing expenses
• The specific housing cost limit for your foreign city, available in the Form 2555 instructions

On Form 2555, you will enter your total qualified housing expenses, calculate your base housing amount, and apply the appropriate limitation to determine your final exclusion amount. Claim the housing exclusion before claiming the Foreign Earned Income Exclusion on the same form to maximize the tax benefit.

Once completed, Form 2555 must be attached to your annual U.S. income tax return, Form 1040. Taxpayers living abroad have an automatic filing extension to June 15, but any tax owed is still due by the standard April 15 deadline.