In a recent development, the Internal Revenue Service (IRS) released Notice 2020-13, outlining updated limitations on housing expenses for individuals employed overseas. This notice, an integral part of Section 911 of the Code, addresses the exclusion of foreign earned income and the associated housing benefits for U.S. citizens working abroad. The article delves into the key aspects of Notice 2020-13, shedding light on the adjustments made to housing limitations and their implications for expatriates.
Understanding Section 911 and Qualified Individuals:
Section 911 of the Code allows eligible U.S. individuals working abroad to exclude a specific amount of foreign earned income annually, accompanied by a housing amount. To qualify for these exclusions, individuals must meet the criteria of a "qualified individual." This entails:
Physical presence in a foreign country for at least 330 days during any 12-month period or bona fide residency in a foreign country for an uninterrupted period covering an entire taxable year.
Maintenance of a tax home in a foreign country, signifying the principal or regular place of business.
These benefits are applicable only during the period in which the taxpayer fulfills the foreign tax home requirement and meets either the bona fide foreign resident test or the 330-day physical presence test.
Foreign Earned Income Exclusion:
Under Section 911, qualified individuals can exclude foreign earned income up to a specified amount, adjusted annually for inflation. The maximum foreign earned income eligible for exclusion, shown in the chart below for the last five years, is prorated based on the number of qualifying days in a taxable year.
Year Limitation on Foreign Earned Income
2016 $101,300
2017 $102,100
2018 $103,900
2019 $105,900
2020 $107,600
Housing Cost Exclusion:
The housing cost exclusion involves the total housing expenses for the taxable year minus a base housing amount, set at 16% of the limitation on foreign earned income for the year. The base housing amount for 2020, for instance, is $17,216. Housing expenses exceeding this base amount may be eligible for the housing exclusion, subject to location-specific limits.
Year Base Housing Amount
2016 $16,208
2017 $16,336
2018 $16,624
2019 $16,944
2020 $17,216
Location-Specific Housing Limits:
For most locations, the housing limit is set at 30% of the maximum/indexed foreign earned income amount for the tax year. This general housing limitation for 2020 amounts to $32,280 (30% x $107,600). However, certain high-cost-of-living areas, such as Tokyo, Japan, are provided with a more generous limitation. In Tokyo's case, the housing cap is $93,200, resulting in a higher housing exclusion for eligible U.S. citizens working in Tokyo.
Practical Implications and Eligible Housing Expenses:
Taxpayers claiming the foreign earned income exclusion or the housing exclusion must calculate the tax on the remaining non-excluded income using applicable tax rates. Eligible housing expenses for exclusion include rent, utilities, property insurance, and rental of furniture and accessories.
Filing Requirements and Form 2555:
To elect the foreign earned income and/or housing exclusion, taxpayers must file Form 2555, Foreign Earned Income, with the IRS. This form establishes the taxpayer's status as a qualified individual, computes foreign earned income, and determines the total amount of excluded income reported on Form 1040.
Insights from Tara Fisher:
The article concludes with insights from Tara Fisher, a seasoned international tax practitioner with 20 years of experience. Fisher's background includes roles with the US Congress Joint Committee on Taxation, PWC's national tax practice, and academic positions at the University of Pittsburgh and American University. Holding a CPA license and accounting degrees from the University of Virginia, Fisher offers a valuable perspective on the intricacies of international tax.
The IRS's issuance of Notice 2020-13 marks a significant update in housing caps for expatriates, impacting U.S. citizens working abroad. As expatriates navigate the complexities of foreign earned income exclusions and housing benefits, a nuanced understanding of Section 911, qualified individual criteria, and location-specific housing limits becomes essential. The comprehensive overview provided here serves as a valuable resource for individuals, tax practitioners, and businesses with international operations.