U.S. TAX GUIDE IN INDIA

How can US expats in India benefit from the Foreign Housing Exclusion in 2024?

The Foreign Housing Exclusion helps US expats in India reduce their US taxable income by excluding certain housing expenses.

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This is especially useful in high-cost cities like Mumbai and Delhi, where rent and living expenses can be significant. By using this exclusion, expats can lower the amount of income they are taxed on by the IRS, which leads to substantial savings.

What expenses qualify for the Foreign Housing Exclusion?

You can exclude specific housing costs like rent, utilities (excluding phone bills), and other essential living costs. These expenses work alongside the Foreign Earned Income Exclusion (FEIE) to reduce your total taxable income in the US. 

Keep in mind, though, that luxury items like expensive furnishings or major renovations are not covered.

In 2024, you have to subtract a base amount of US$20,400 from your total housing expenses, which is equal to 16% of the FEIE limit of US$126,500. After deducting this base amount, the remaining qualifying expenses can be excluded from your taxable income.

How does the Foreign Housing Exclusion work in high-cost cities like Mumbai?

If you live in a high-cost city like Mumbai, where rent and living expenses are high, the Foreign Housing Exclusion can make a big difference in your tax savings. 

For example, if your total housing expenses in 2024 are US$35,000, you first subtract the base amount of US$20,400. This leaves US$14,600, which can be excluded from your taxable income.

The IRS also sets a maximum limit for housing expenses in each city. For Mumbai, this limit is generally higher than in other areas, which means you can exclude more of your housing costs. 

However, you cannot exclude more than your actual expenses or the limit set by the IRS.

Can US expats use the Foreign Housing Exclusion along with other tax benefits?

Yes, US expats can combine the Foreign Housing Exclusion with other tax benefits, such as the FEIE and the Foreign Tax Credit (FTC). You can use the FEIE to exclude up to US$126,500 of your earned income, apply the Foreign Housing Exclusion for additional housing costs, and use the FTC to reduce any US taxes owed on other income, like investment earnings or any income above the FEIE limit.

Just remember that each benefit applies to different parts of your income, and they cannot be used for the same income.

What are some common misconceptions about the Foreign Housing Exclusion?

One common misconception is that you can exclude all of your housing costs without limits. In reality, the IRS has specific caps on how much you can exclude, which depends on the city where you live. 

Another misunderstanding is that luxury items or high-end renovations qualify for the exclusion. The IRS only allows necessary and reasonable expenses, so it’s important to know which costs are eligible.

What records should US expats keep to claim the Foreign Housing Exclusion?

To claim the Foreign Housing Exclusion, it is important to keep detailed records of your housing expenses. 

This includes receipts for rent, utilities, and other qualifying costs. Proper documentation is important in case the IRS asks for proof of your claimed expenses.

When you file your US tax return, you will need to fill out Form 2555 to claim the Foreign Housing Exclusion.

Why should US expats in India consult a tax professional?

  • Maximizing Your Benefits: They can help you use the FEIE, Foreign Housing Exclusion, and FTC in the best way to lower your taxable income.
  • Avoiding Mistakes: Errors in applying exclusions or credits can lead to big penalties and interest charges. A tax professional ensures your filings are correct and compliant with IRS rules.
  • Using the US-India Tax Treaty: A tax advisor who knows both US and Indian tax laws can guide you through treaty provisions.

How do FBAR and FATCA obligations affect US expats using the Foreign Housing Exclusion?

Besides filing income tax returns, US expats must also follow FBAR and FATCA rules:

  • FBAR: If the total value of all your foreign bank accounts exceeds US$10,000 at any point during the year, you need to file an FBAR. This includes accounts like savings, checking, brokerage, and pension accounts.
  • FATCA (Form 8938): FATCA requires you to report certain foreign financial assets if their total value exceeds US$200,000 at the end of the year or US$300,000 at any time during the year. Form 8938 helps the IRS track these assets, which might affect your tax.

What should US expats do if they missed filing previous tax returns or FBARs?

If you have missed filing your tax returns, FBARs, or FATCA forms, it’s important to fix this as soon as possible. The IRS offers the Streamlined Filing Compliance Procedures for taxpayers who were unaware of their filing responsibilities.

This program lets US expats catch up on their filings without facing major penalties, as long as they can prove the non-compliance was not intentional. Using the Streamlined Procedures can help you get back on track and avoid further issues, such as penalties or even criminal charges.