In Notice 2018-33, the IRS has announced 2018 adjustments to the limitation on housing expenses under the housing cost exclusion for specific locations.
The guidance further provides that some taxpayers may elect to apply the 2018 limitation for tax years beginning in 2017.
The excludable housing cost amount is the excess, if any, of:
- The individual’s allowable housing expenses for the year (that is, the housing expense limitation)
- Divided by a base amount.
For 2018, a taxpayer’s allowable housing expenses, assuming he or she is eligible for the exclusion during the entire year, generally can’t exceed $31,230. The base amount is $16,656. Therefore, the maximum housing cost exclusion for 2018 is generally $14,574 ($31,230 − $16,656).
However, the IRS is permitted to issue regulations or other guidance that provides for an adjustment to the maximum allowable housing expense limitation based on geographic differences in housing costs relative to housing costs in the U.S.
Separately, in a Revenue Procedure, the IRS has waived the 2016 residency and presence tests that apply for purposes of foreign earned income and foreign housing cost exclusions for certain U.S. individuals in Turkey.
The IRS, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in Turkey beginning on October 29, 2016.
Accordingly, an individual who left Turkey on or after that date will be treated as a qualified individual for the period during which that individual was present in, or was a bona fide resident of, Turkey, if the individual establishes a reasonable expectation of meeting the requirements for those conditions.
To qualify, an individual must have established residency, or have been physically present, in Turkey on or before Oct. 29, 2016, the date that the IRS determined that individuals were required to leave the country.
The foreign earned income exclusion applies only to income resulting from performing services as an employee or as an independent contractor. “Earned income” means salaries, wages, professional fees and other amounts received as compensation for personal services. Self-employment income can qualify for the foreign earned income exclusion.
The amount of foreign wages and salary a taxpayer can exclude each year is limited to actual foreign earned income or the annual maximum dollar limit, whichever is less. The maximum foreign earned income exclusion for 2016 is $101,300.
In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify for the exclusions and deduction under either the bona fide foreign residence test or the physical presence test.
Waiver of Residency and Presence Tests
The Tax Code exempts “qualified individuals” from taxation of their foreign earned income and the housing costs.
A qualified individual is an individual whose tax home is in a foreign country and who meets one of two tests:
- The bona fide foreign residence test, which applies to a U.S. citizen (or, in certain situations, a U.S. resident alien) who satisfies the IRS that he or she has been a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year, or
- The foreign physical presence test, which applies to a U.S. citizen or resident alien who, during a period of 12 consecutive months, is present in one or more foreign countries for at least 330 full days.
Under certain circumstances, the time requirements of the two tests may be waived. When that happens, the taxpayer is treated as having met the tests for the period during which he or she was a bona fide resident of the foreign country, even though the relevant time requirements haven’t been met.
Three conditions must be met for the waiver to apply:
- The taxpayer must have been a bona fide resident of, or present in, a foreign country for a period of time.
- Before the taxpayer meets the time requirements for either test, he or she must have left the foreign country during a period in which the IRS determines, after consultation with the State Department, that individuals had to leave because of war, civil unrest or similar adverse conditions that prevented the normal conduct of business.
- The taxpayer must establish to the IRS’s satisfaction that he or she could reasonably have been expected to meet the time requirements but for the adverse conditions.
Previous 2016 Waiver
The IRS had previously waived the requirements for certain U.S. individuals in South Sudan, due to adverse conditions beginning on July 10, 2016.
For 2017, the IRS, in consultation with the Secretary of State, has determined that no country has experienced war, civil unrest, or similar adverse conditions that precluded the normal conduct of business.
For a no-obligation discussion on the possible impact and steps you should take now, contact Lien Le, the head of our International Tax practice.