Code §911(a) allows a qualified individual to elect to exclude from gross income an “Exclusion Amount” related to foreign earned income and a “Housing Cost Amount.” The Exclusion Amount for 2017 is $102,100.
The Housing Cost Amount is generally defined as an amount equal to the excess of (A) the “Housing Expenses” of an individual for the taxable year, over (B) 16% of the Exclusion Amount.
For example, if an individual had Housing Expenses during 2017 of $25,000, the Housing Cost Amount that could be excluded from that individual’s income would be $8,664 (25,000 - [102,100 X 16%]).
Housing Expenses, however, are generally limited to an amount equal to 30% of the Exclusion Amount in effect for the calendar year ($30,630 for 2017). Thus, the maximum Housing Cost Amount for 2017 which is excludible from income would generally be $14,294 ($30,630 - [102,100 X 16%]).
The IRS is authorized to issue guidance to adjust the limit on Housing Expenses based on geographic differences in housing costs relative to housing costs in the United States. Pursuant to this authority, the IRS published Notice 2017-21 to provide adjustments to the limitation on Housing Expenses for high cost locations.
For example, the limitation on Housing Expenses for 2017 in Hong Kong is $114,300. Therefore, an individual living in Hong Kong with housing expenses in 2017 of $114,300 or more could exclude from income an amount of $97,964 ($114,300 - [102,100 X 16%]).
An individual generally qualifies for Code §911 during the period which the individual meets the tax home requirement and either the bona fide residence requirement or the physical presence requirement. If it is the first year or the last year that an individual meets these requirements, the amounts above are prorated for the year accordingly.