The Internal Revenue Service (IRS) recently issued Notice 2016-21, setting the country-by-country limitation on housing expenses deductible under section 911 of the Internal Revenue Code for 2016.
The housing expenses deduction enables a qualifying taxpayer to include qualified housing expenses subject to certain limitations. ‘Qualified housing expenses’ are specified to include rent, utilities (excluding telephone), real and personal property insurance, repairs and maintenance, furniture rental, and parking. Also included is the fair rental value of housing provided by, or on behalf of an employer, provided it has not been excluded elsewhere.
Excluded is mortgage interest, property taxes and other housing expenses deductible elsewhere on the U.S. income tax return. The calculation is complex, being subject to numerous limitations.
The same rules that qualify or disqualify a taxpayer from taking the foreign earned income exclusion apply, ie, the tax home test and either the bona fide residence test or physical presence test.
Arithmetical limitations include:
1. Country-by-country limitation. The taxpayer can claim, subject to the following limitations, the lesser of qualified housing expenses and the amount designated country-by-country and city-by-city.
Notice 2016-21 lists updated country-by-country/city-by-city limitations. For New Zealand’s three main cities the following limitations have been set for 2016:
Auckland US $35,700
Wellington US $33,800
Christchurch US $32,100
It is interesting to compare Auckland, recently announced as the fifth most expensive city in terms of housing, with other cities which are also renowned for being the most expensive in the world for housing:
London US $ 82,000
Tokyo US $ 81,300
Geneva US $ 93,300
2. The amount is reduced by the number of non-qualifying days outside the U.S.
3. Only the excess over US $16,128 (if any) for 365 qualifying days can be claimed, otherwise abated for the number of non-qualifying days.
4. The housing deduction is limited to 30% of the overall foreign housing/foreign earned income exclusion. For 2015 the overall exclusion is US $100,800, and thus the foreign housing deduction cannot exceed $30,240.
5. The aggregate of the foreign earned income exclusion and the foreign housing deduction cannot exceed the overall limit of US $100,800 for 2015. This amount, originally US $80,000, has been adjusted annually for inflation.
Other adjustments can apply, and frequently do not result in any allowable housing deduction in addition to the foreign earned income exclusion.
Section 911 is one of the key provisions of the Internal Revenue Code that deals with the income earned by U.S. citizens and residents abroad. Section 911 is mirrored in Form 2555 Foreign Earned Income, a form that is frequently filed by U.S. taxpayers abroad.
The Section 911 foreign earned income exclusion and foreign housing deduction are frequently misinterpreted. If considering using these provisions, it is advisable to engage U.S. expatriate tax specialists in the application of these rules.
This article provides general information, current at the time of publication. The information contained in this article does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to actions being taken based on the information contained in this article.
NZ US Tax Specialists Ltd disclaims all responsibility and liability (including, without limitation, for any direct or indirect consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk.