A Section 911 Income and Housing Exclusion Rule Overview

A Section 911 Income and Housing Exclusion Rule Overview

Section 911 Income and Housing Exclusion Rule Overview

When a U.S. person taxpayer lives and works overseas, they may qualify for the foreign earned income exclusion to avoid having to pay taxes upwards of $120,000 of income each year (the value adjusts each year for inflation). In addition, some taxpayers may be able to exclude the cost of housing as well. Thus, some taxpayers who live and work overseas may be able to exclude a significant amount of income from their U.S. tax liability. And, if taxpayers are married filing joint and both filers meet the requirements for being ‘qualified’ under IRC Section 911 come and then both taxpayers may have the ability to exclude this income. It is important to note, that this only refers to earned income and even if the income is earned, there are various exceptions, exclusions, and limitations that apply. In addition, the amount of housing exclusion that can be excluded can vary depending on where the taxpayer lives. Let’s walk through the basics of Internal Revenue Code Section 911 and how it can impact a person’s tax liability.

What are Section 911 Housing Costs?

Not all costs associated with foreign housing can be excluded using section 911 — there are some limitations.

26 U.S.C. 911 (c)(1)

• • • (1) In general

      • The term “housing cost amount” means an amount equal to the excess of—

        • (A) the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under paragraph (2), over

        • (B) an amount equal to the product of—

          • (i) 16 percent of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by

          • (ii) the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).

What does this mean?

It means that some housing costs can be considered excludable, while some costs are not. Typically, the first amount of housing costs are not deductible until a certain threshold is met, and then the next ‘middle’ amount of expenses that the taxpayer claims for housing can be deducted. Thereafter, any remaining expenses cannot be deducted either and are essentially ‘phased-out’ — so that the taxpayer has to fall into the sweet spot as to the total amount of expenses to determine whether or not any of those expenses can be excluded.

What are Housing Expenses Under Section 911

Typically, a majority of ‘reasonable’ house expenses can be deducted, but it does not include all expenses, such as interest and taxes that are deductible or allowable as a deduction under other code sections.

26 U.S.C. (c)(3)

• • • (3) Housing expenses

      • (A) In general

        • The term “housing expenses” means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term—

          • (i) includes expenses attributable to the housing (such as utilities and insurance), but

          • (ii) does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a). Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances.

Who is a Section 911 Qualified Individual?

To meet the requirements of being a qualified individual, the taxpayer essentially must live in a foreign country the majority of the year in which that country is his tax home and must meet either the physical presence test or the bona fide residence test.  The taxpayer does not have to meet both the physical presence and the bona fide residence test, but rather only one test. For the most part, meeting the physical presence test is easier and just requires a taxpayer to have resided in the foreign country for a sufficient number of days in the tax year (aka ‘counting days test’). To qualify under the bona fide residence test, the taxpayer has a steeper climb and must prove based on the facts and circumstances that they are a bona fide resident of that foreign country and not just a counting days test.

26 U.S.C. 911 (d)(1) Qualified individual

• • • The term “qualified individual” means an individual whose tax home is in a foreign country and who is—

      • (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

      • (B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

FEIE vs Foreign Housing Exclusion

We have additional resources you can access on the foreign earned income exclusion as distinct from the foreign housing exclusion — even though both exclusions use Form 2555.

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