If you are a US taxpayer, you need to know about the Foreign Housing Deduction for digital nomads. As a US citizen or resident, you keep paying taxes to the US even if you don’t live there anymore. In order to limit your US tax burden, there are some tax benefits that can help you.
In some other posts, we already discussed the Foreign Earned Income Exclusion and the Foreign Tax Credit. Now we’ll dive deeper into the Foreign Housing Deduction (FHD) for digital nomads.
What is the Foreign Housing Deduction for digital nomads?
The FHD allows you to deduct certain housing expenses from your taxable income. By lowering your taxable income, you will also lower your eventual tax liability.
When to apply the Foreign Housing Deduction for digital nomads?
You can apply the FHD if you receive self-employment income. However, as an employee, there is a similar deduction called the Foreign Housing Exclusion (FHE). This is basically the same but then for individuals with employment income.
In order to qualify for the FHD or FHE, you need to meet some conditions. Basically, it comes down to the fact that you must ensure that you qualify for the Foreign Earned Income Exclusion (FEIE). You will qualify for the FEIE based on the physical presence test or the bona fide residence test.
On top of this, your housing expenses must have been higher than 16% of the tax free amount under FEIE ($120.000 for 2023; so, $19.200).
Qualifying expenses
Expenses like rent, utilities (except internet, telephone & internet), repairs and insurance qualify. The purchase of furniture, domestic personnel or any lavish expenses in general won’t qualify.
Calculation
The FHD is based on your actual expenses for housing abroad. The maximal amount you can deduct is equal to 14% of the amount of the FEIE for that given tax year. However, because of the nature of the calculation, your expenses qualify only if they exceed 16% of the FEIE for that year. The IRS deems the 16% as the basic cost of housing expenses in the US. Therefore, this amount is not taken into account as a deduction.
Nevertheless, depending on the place you live, your actual deduction can be higher. The reason is that the IRS allows you to account for the high cost of living in certain places (indexed yearly).
On top of this, you need to make a correction for the amount of days you spend in that specific place compared to the total amount of days of the year. So, if you travel to a lot of different places this could complicate your calculation.
Foreign Housing Deduction for digital nomads: conclusion
If you are a US taxpayer you need to keep the Foreign Housing Deduction for digital nomads in mind. By this way, you can limit your US tax burden by claiming a deduction for expenses made abroad for housing.
