The Internal Revenue Service (IRS) recently issued Notice 2022-10, announcing certain taxpayers who work outside of the United States in specified high-cost areas can deduct or exclude a greater portion of their housing costs from gross income for the 2022 tax year than is otherwise allowable.
Geographic Differences
Typically, the US federal government taxes its citizens and residents on their worldwide income. However, individuals who have a “tax home” in a foreign country and who satisfy one of two tests may elect to exclude from gross income certain foreign housing costs paid or incurred on their behalf. Alternatively, they may claim a deduction if the costs are not paid by an employer. This is known as the foreign housing cost exclusion.
The excludable housing cost amount is the excess, if any, of the individual’s allowable housing expenses for the year (the housing expense limit) over a base amount. For 2022, a taxpayer’s allowable housing expenses, assuming the taxpayer is eligible for the exclusion during the entire year, generally can’t exceed $33,600. The base amount is $17,920. Therefore, the maximum housing cost exclusion for 2022 is generally $15,680 ($33,600 − $17,920).
However, the IRS is permitted to issue regulations or other guidance that provide for an adjustment to the maximum allowable housing expense limitation based on geographic differences in foreign housing costs relative to US housing costs.
The Latest Amounts
In Notice 2022-10, the IRS has increased the maximum allowable housing expense limitation above the otherwise applicable limitation of $33,600 for many locations.
For example, say a US taxpayer lives and works in Hong Kong for all of 2022. The maximum housing cost exclusion there is $96,380 ($114,300 full-year limit on housing expenses in Hong Kong minus the $17,920 base amount).
High-cost area amounts for some cities remain unchanged from 2021, Hong Kong being one example, while others have decreased or increased. For instance, Paris has decreased from $76,300 in 2021 to $71,000 in 2022, while Vancouver has increased from $49,300 in 2021 to $49,700 in 2022.
For some locations, the limit on housing expenses provided in Notice 2022-10, is higher than the limit on housing expenses provided in Notice 2021-18. A qualified individual incurring housing expenses in one of these locations during 2021 may apply the adjusted limitation on housing expenses provided in Notice 2022-10 in lieu of the amounts provided in Notice 2021-18 and as set out in the 2021 instructions for Form 2555, “Foreign Earned Income.”
Check the Numbers
If you live and work in a specified high-cost area, check out the latest numbers for the foreign housing cost exclusion. Moore Doeren Mayhew works with a number of companies that have expatriate programs and regularly discusses the issue of housing costs with them, along with other issues impacting expatriates working overseas. If you would like to have a discussion about these issues with one our advisors, contact us today.
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