In March, the Internal Revenue Service (IRS) released important updates and adjustments regarding 2023 adjusted housing expense limitations. Additionally, updates were made to the residency and physical presence tests for 2022 foreign earned income and foreign housing cost exclusions applicable to qualified individuals in specified foreign locations. In some instances, this could help taxpayers reduce certain equalization payments for employers with expatriate programs.
Moore Doeren Mayhew has outlined some highlights of the recent updates below.
2023 Adjusted Foreign Housing Expense Limitations
Foreign housing expense limitations are used to calculate the foreign housing exclusion for high-cost areas. Qualified taxpayers may elect to exclude foreign-earned income from U.S. gross income, and exclude or deduct their housing cost amount. The amount of foreign-earned income that can be excluded is a fixed amount. However, the maximum housing cost amount is calculated by way of a complex formula.
The IRS recently published the latest adjustments in Notice 2023-26. The housing cost amount is the total of the taxpayer’s housing expenses for the year minus a base housing amount, which is $19,200 for 2023.
A qualified individual whose entire taxable year is within the applicable period is limited to maximum housing expenses of $36,000 for 2023. This maximum is known as the housing cost limitation. However, for certain expensive locations, the U.S. Secretary of the Treasury allows for a larger housing cost limitation. If the 2023 housing expense limitation is higher than the 2022 housing expense limitation provided in Notice 2022-10, qualified taxpayers may apply the 2023 limitations to their 2022 tax year.
|
FOREIGN HOUSING COSTS LIMITATIONS |
|||
|
Country |
Location |
2022 |
2023 |
|
Canada |
Toronto |
$63,200 |
$59,900 |
|
China |
Hong Kong |
$114,300 |
$114,300 |
|
China |
Shanghai |
$57,001 |
$57,001 |
|
France |
Paris |
$71,000 |
$66,400 |
|
Japan |
Tokyo |
$92,400 |
$77,000 |
|
Mexico |
Mexico City |
$47,900 |
$47,900 |
|
Singapore |
Singapore |
$82,300 |
$82,900 |
|
Switzerland |
Geneva |
$100,400 |
$98,300 |
|
United Kingdom |
London |
$69,500 |
$64,600 |
Even though the base housing amount will increase for 2023, you do not use that amount if you elect to use the 2023 limitations rather than the 2022 ones. For example, you would elect the increased limitation in Singapore for 2022 even though in 2023 the actual deduction might be less. You will note the number of limitations is decreasing for 2023 because housing costs have declined in several locations. Yet, the limitation for Hong Kong is the highest housing cost location at $114,300.
Waived Residency/Presence Tests for 2022 Foreign Exclusions
In Revenue Procedure 2023-19, the IRS recently waived the residency and physical presence tests for 2022 foreign-earned income and foreign housing cost exclusions for qualified individuals in Belarus, China, Ethiopia, Iraq, Mali and Ukraine because of adverse conditions in those countries.
The Internal Revenue Code allows qualified individuals to elect to exclude from their U.S. gross income a limited amount of their foreign earned income — $112,000 for 2022 — and to deduct their respective housing cost amounts. Qualified individuals are U.S. citizens who:
- Establish they are bona fide residents of a foreign country for an uninterrupted period that includes an entire tax year, and
- Have been present in a foreign country for at least 330 full days over a consecutive 12-month period.
The IRS waives these time requirements for qualified individuals who must depart their foreign country of residence because of war, civil unrest or similar adverse conditions in that country. These are referred to as “waiver countries.”
To be eligible for relief in this procedure, an individual must have established residency or have been physically present in the foreign country on or before a specified departure date. The Treasury Secretary announces departure dates, which indicate when U.S. individuals must leave the country in question.
Waiver countries for tax year 2022 include the below based on correlated departure dates:
- Ethiopia: Jan. 3, 2022
- Iraq: Jan. 14, 2022
- Ukraine: Feb. 12, 2022
- Belarus: Feb. 28, 2022
- China: April 11, 2022
- Mali: July 29, 2022
Need Help Managing Your Expat Program?
Moore Doeren Mayhew works with a number of companies’ expatriate programs. Our international tax advisors assist the individuals covered under these programs and help to monitor the constant changes from the IRS that may impact them. If you would like to discuss your expatriate program or issues related to housing expense limitation rules, contact a Moore Doeren Mayhew advisor today.
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