Living in Hong Kong can get expensive, but the FEIE housing exclusion helps you lower your U.S. tax bill. In 2023, IRS allows you to exclude up to $120,000 of foreign income and up to $36,000 in housing costs (rising to $37,950 for 2024). At American Pacific Tax, we’ll walk you through each step so you can claim this benefit. Good news, it’s simpler than it sounds.
By following these six steps, you’ll maximize your housing exclusion and see real FEIE tax savings.
1. Verify your FEIE eligibility
First, confirm you qualify for the foreign earned income exclusion. Check the FEIE eligibility criteria to make sure you meet one of two tests:
Meet the qualification tests
- Bona fide residence test: you live in a foreign country for a full tax year.
- Physical presence test: you spend at least 330 full days in any 12-month period abroad (learn more at FEIE physical presence test).
You’ll need to track your travel days carefully (IRS requires full-day counts).
2. List qualifying housing expenses
Next, gather your actual housing costs for the part of the year you qualified. Include only reasonable expenses paid for you, your spouse, or dependents:
- Rent or fair market value if your employer pays directly
- Utilities (electricity, water, gas)
- Property and rental insurance
- Parking fees near your home
- Household repairs and maintenance
- Furniture rentals
Avoid these non-qualifying costs:
- Mortgage payments or purchase of property
- Improvements that add value (new roof, extensions)
- Furniture purchases and accessories
- Domestic labor (housekeepers, gardeners)
- Cable, phone, or internet fees
3. Compute your base housing amount
The IRS sets a base housing amount to prevent excluding everyday living costs. You calculate it with this formula:
base housing = (0.16 × maximum FEIE) ÷ 365 days × qualifying days
Refer to the chart below for daily rates:
| Tax year | Maximum FEIE | Base housing daily rate |
|---|---|---|
| 2023 | $120,000 | ($120,000 × 0.16) ÷ 365 ≈ $52.60 |
| 2024 | $126,500 | ($126,500 × 0.16) ÷ 365 ≈ $55.48 |
(See FEIE maximum exclusion for more on annual limits.)
Multiply the daily rate by the number of days you qualified to get your total base housing amount.
4. Calculate your housing exclusion
Subtract your base housing amount from your total qualifying expenses:
housing exclusion = total eligible expenses − base housing amount
Keep these limits in mind:
- Cap at 30% of the FEIE max (for example, $36,000 in 2023; $37,950 in 2024)
- Cannot exceed your foreign earned income for the year
- If you’re both an employee and self-employed, you choose exclusion or deduction, not both
- This exclusion reduces only your regular income tax, not self-employment tax
5. Report it on Form 2555
To claim the housing exclusion, complete and attach Form 2555 to your tax return:
- Part VI: fill in your housing expenses
- Part VIII: enter your housing exclusion calculation
- Part IX: provide information on your foreign tax home
Follow the instructions at FEIE form 2555 to avoid errors.
6. Keep detailed records
Save receipts, lease agreements, utility bills, and a log of qualifying days (dates and locations). You may need them if the IRS requests proof of your housing costs or days abroad.
Quick recap and next steps
- Verify you meet FEIE requirements
- List only qualifying housing expenses
- Compute your base housing amount using the IRS formula
- Subtract base amount from expenses to get your exclusion
- Complete Parts VI, VIII, IX on Form 2555
- Retain records for audit support
Ready to claim your housing exclusion? Reach out to American Pacific Tax for personalized guidance and make sure you keep more of your hard-earned money. You’ve got this.
Frequently asked questions
Can both spouses claim the FEIE housing exclusion?
If you file jointly and live together in the same home, only one spouse may claim the housing exclusion. If you live in separate households abroad (not within commuting distance), each spouse can file separately and claim their own exclusion.
What housing expenses qualify for the exclusion?
Qualifying costs include rent (or fair market rent), utilities (electricity, water, gas), property insurance, parking fees, household repairs, and furniture rentals. Expenses such as mortgage payments, domestic labor, furniture purchases, and cable or phone service do not qualify.
Does the housing exclusion reduce self-employment tax?
No, the FEIE housing exclusion lowers your regular income tax only. It does not reduce self-employment tax, so you still calculate and pay Social Security and Medicare taxes on your net self-employment earnings.
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