How the Foreign Housing Exclusion works
The Foreign Housing Exclusion (or Deduction, for the self-employed) is the under-used companion benefit to FEIE. It lets you exclude (or deduct) qualified foreign housing costs ABOVE a base amount, up to a city-specific cap. The math is layered:
- Step 1 — Housing base amount: 16% of the year’s FEIE limit. For 2026, that’s 16% × $132,900 = $21,264. You can’t exclude the first $21,264 of housing costs — those are considered baseline.
- Step 2 — Maximum housing exclusion: 30% of FEIE = $39,870 for 2026 (standard). High-cost cities have higher caps published in IRS Notice 2024-32 (and 2026 successor). The maximum housing EXPENSES you can claim is the cap; the EXCLUSION is cap minus base.
- Step 3 — Excluded amount: qualified housing expenses (subject to cap) minus the base. For someone in London paying $50,000 in rent, the math is: $50,000 → capped at the high-cost-city max (~$70K-ish for London) → cap − base = exclusion. Around $48K of housing cost gets excluded in addition to the $132,900 FEIE.
- Step 4 — Proration: if you didn’t qualify all year, multiply both the base amount and the cap by qualifying days ÷ days in year.
Why this matters: in high-cost cities, the housing exclusion can be worth more than the FEIE itself for a given filer. Someone making $250K in London who pays $60K/year in rent might exclude $132,900 (FEIE) + ~$48K (housing) = $180K+ from U.S. tax. That’s the difference between a five-figure U.S. tax bill and a four-figure one.
City-specific caps (2025 IRS Notice 2024-32)
The IRS publishes annual high-cost-city housing adjustments. 2025 values published in Notice 2024-32; 2026 successor typically published Q4 2025. A few examples (annual maximums from 2025 notice — verify against 2026 successor before filing):
- Standard / default: $36,956 (2025) → estimated ~$37,800 for 2026
- Hong Kong: $114,300 (highest in 2025)
- Singapore: $69,400
- London: $69,200
- Paris: $58,400
- Dubai: $57,000
- Tokyo: $48,200
- Zurich/Geneva: $99,000
- Mumbai: $63,400
The full list (200+ cities) is in the IRS notice. 2026 figures used in this calculator are 2025 published values, used conservatively — the actual 2026 figures may differ. Verify against the 2026 Form 2555 Table 2 when published.
What counts as “qualifying housing expenses”
Per IRS Form 2555 instructions:
Includes:
- Rent (your home, an apartment)
- Utilities — gas, electricity, water, sewer (but NOT telephone, cable TV, or internet)
- Real and personal property insurance
- Non-deductible occupancy taxes
- Leasing fees and commissions paid in connection with renting
- Household repairs (not improvements)
- Residential parking fees
- Rental of furniture and accessories
Does NOT include:
- Mortgage principal or interest (use Foreign Tax Credit for foreign mortgage interest deduction if eligible)
- Cost of buying property (capital expenses)
- Purchased furniture (vs. rented)
- Capital improvements (vs. repairs)
- Cost of domestic labor (housekeepers, gardeners) — though IRS gives narrow exceptions
- Pay TV (cable, satellite, streaming)
- Telephone or internet
Employee vs. self-employed — exclusion vs. deduction
Same dollar amounts, different mechanics:
- Employees use the Foreign Housing Exclusion. It reduces gross income on Form 2555 Part VI. Lower AGI → less U.S. tax.
- Self-employed filers use the Foreign Housing Deduction. It’s an above-the-line deduction on Schedule 1 of Form 1040. Limited to foreign earned income remaining after FEIE — so high-income self-employed can use it; high housing costs against low SE income can hit the limit.
Critical SE note: the housing deduction reduces income tax but does NOT reduce SE tax (15.3%). Same trap as FEIE. See our SE Tax Abroad calculator.
Common mistakes
- Counting mortgage payments. Mortgage principal is a capital expense and not qualifying; mortgage interest belongs on Schedule A or routes through FTC. Easy to over-claim if you skim Pub. 54.
- Counting telephone/cable. Telephone, cable TV, and internet are NOT qualifying — even though they’re “home costs” in your budget.
- Forgetting proration. If you moved abroad July 1, you only qualify for ~184 days, so the base ($21,264) and cap both shrink to ~50%. Many filers forget and over-claim.
- Using the wrong city. The IRS list is specific (e.g., “London” vs. greater London commuter towns). Check Form 2555 Table 2 for the exact city.
Educational only — not tax advice. The Foreign Housing Exclusion is one of the most-mathed-up sections of an expat return. The interaction with FEIE, FTC, AMT, and state taxes is non-trivial. For an actual return, use expat-focused tax software (which applies city caps automatically) or a qualified preparer. This calculator is a planning estimate; the figures shown are not guaranteed to match what your final return looks like.
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