May 2 2018

Foreign housing costs limitations for 2018

Source: IBFD Tax Research Platform News

On 1 May 2018, the US Treasury Department and the Internal Revenue Service (IRS) issued Notice 2018-44 with the amounts to be used by US citizens and residents who are working abroad to compute their exclusion or deduction for excessive foreign housing costs.

Notice 2018–44 is issued pursuant to section 911 of the US Internal Revenue Code (IRC). This section permits qualified individuals to exclude foreign earned income from US taxation up to an annual exclusion amount (USD 103,900 for 2018, and to claim an exclusion or deduction for excessive foreign housing costs.

The threshold amount for determining whether foreign housing costs are considered excessive is 16% of the limitation for the foreign earned income exclusion. In addition, a limitation applies to the maximum amount allowed, which cannot exceed 30% of the annual foreign earned income exclusion. The Treasury Department and the IRS are authorized to adjust the maximum limitation based on geographic differences in foreign housing costs relative to housing costs in the United States.

Notice 2018–44 sets out the threshold amounts, the limitation amounts, and the adjusted per-city amounts that are permitted for specified world cities, including both daily and annual amounts.

For 2018, the threshold amount over which foreign housing costs are considered excessive is USD 16,624 (USD 103,900 x.16). The 30% maximum limitation amount is USD 331,170 (USD 103,900 x.30). The adjusted amounts for specified world cities are given in a table included in the notice.

Notice 2018-44 is effective for tax years beginning on or after 1 January 2018. Notice 2018-44 provides, however, that taxpayers may elect to use the 2018 amount for a particular city for taxable years beginning in 2017 if it is higher than the amount published for 2017 in Notice 2017-21.

Notice 2018-44 revokes Notice 2018-33, issued on 23 April 2018, which used an incorrect amount (i.e. USD 104,100) for the maximum foreign earned income exclusion to calculate the housing cost amount for 2018.

Notice 2018-44 will appear in the IRS Internal Revenue Bulletin (IRB) as part of IRB 2018-21 dated 21 May 2018.