TCJA and Expats: What SALT Changes Mean for the Foreign Housing Exclusion and Deduction
The Tax Cuts and Jobs Act (TCJA), also called the 2018 tax reform, is the most drastic change to the Internal Revenue Code in over 30 years. When it comes to expats, most of the key changes brought on by TCJA have little or no effect given that the chief expat benefits like the foreign earned income exclusion are still effect. However, of the vast changes made to itemized deductions, there is a notable change that affects expats with respect to foreign real estate taxes. Here’s what it entails.
Foreign Housing Deduction and Exclusion
In addition to the foreign earned income exclusion (which is currently $103,900), you can also exclude certain amounts for foreign housing per conditions of your employment. If you are self-employed, you can claim the foreign housing deduction although it has no impact on self-employment tax.
Eligible foreign housing expenses are what’s considered reasonable housing costs in the foreign country where you reside with your spouse and/or dependents (lavish housing expenses don’t count). The cost of rent (or fair market value of rent, if the employer is providing it in-kind), utilities, insurance for the home and your personal property, certain occupancy taxes, furniture rental (but not purchases) are also included as eligible expenses. Moving expenses and the cost of purchasing foreign property do not count, nor do foreign home improvements.
Generally, your foreign housing expenses are limited to 30% of the maximum foreign earned income exclusion for the year but varies by location. Eligible foreign housing expenses also cannot exceed your foreign earned income. If you are taking the deduction instead of the exclusion, it can’t be more than your foreign earned income after subtracting the amount you’re eligible to exclude.
Foreign Real Estate Taxes
Of the sweeping changes resulting from TCJA, one of the most material ones has been the state and local tax (SALT) deduction for both income and real estate taxes. Now capped at $10,000 per year, it also eliminated the ability to deduct foreign real estate taxes entirely regardless of amount.
Given that most people don’t itemize on their tax returns and even fewer will now with the expansion to the standard deduction, this item might not seem of concern to expats who were already claiming the foreign tax credit for foreign income taxes paid. However, if you are paying real estate taxes on foreign housing that you own or rent, you may now include them as qualified housing expenses.
Under the law, so long as an expense was deductible under another section of the tax code such as the case was with moving expenses until they were suspended under TCJA, then they couldn’t be factored in for foreign housing. Since foreign real estate taxes are now no longer allowed as an itemized deduction, they can be included with the rest of your eligible housing expenses. All of the other aforementioned limitations still apply such as the conditions of the housing and being limited relative to how much foreign earned income you have. But since real estate taxes are considered a reasonable housing expense, you can now include them in your foreign housing exclusion calculation.
Protax Consulting Services Inc. has over two decades of specialized international taxation experience. Contact us today for a free initial consultation on your expat taxes and concerns with TCJA.