IRS Releases Housing Cost Amounts Eligible for Exclusion or Deduction for 2021 (Notice 2021-18)

Updated: Jun 16

Employers sometimes pay housing costs to an employee to cover increased costs of living in a foreign country. The foreign housing exclusion applies to these amounts paid by employers. There is also a foreign housing deduction available to those self-employed.

A taxpayer may take both the Foreign Earned Income Exclusion and the Foreign Housing Exclusion, they are calculated in a coordinated fashion and taken on the Form 2555. The foreign housing deduction or exclusion amount can be deducted from gross income if you qualify under the bona fide residence test or the physical presence test.


Amount of the housing exclusion/deduction The exclusion only applies to those costs considered paid for with employer-provided amounts which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.


Base Housing Amount the foreign housing amount is the total foreign housing expenses minus the base housing amount. The base housing amount is tied to the indexed maximum foreign earned income exclusion for that year. The base housing amount is 16% of the maximum foreign earned income exclusion divided by 365 (366 in leap years), multiplied by the number of days in your qualifying period that fall within your tax year.


Maximum Housing Exclusion/Deduction Housing expenses may not exceed a certain limit depending on the area where you incur housing expenses. The standard maximum exclusion or deduction is 30% of the current foreign earned income exclusion but can be adjusted for high-cost locations.


Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2021 (Notice 2021-18)


Section 911(c)(2)(B) authorizes the Secretary to adjust the percentage under section 911(c)(2)(A)(i) (which determines the limit on housing expenses) based on geographic differences in housing costs relative to housing costs in the United States. Pursuant to that, a table of locations has been released with these adjustments.


For example, per Notice 2021-18, the annual maximum in 2021 for Cologne, Germany is $56,200 and Hong Kong is $114,300 in lieu of the indexed amount of $32,610.

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