The Foreign Housing Exclusion – or FHE – is a means provided by the IRS to accommodate for expenses that come with living and working overseas.
The US law has its very own framework, when determining if and how much you can use it. Let’s highlight the most common aspects:
- Bona fide or physical residence test.
- Capped at 30% of the Foreign Earned Income Exclusion minus a base housing allowance.
- Only qualifying expenses allowed – no mortgage payments.
Obviously, one would wonder if Germany has something equivalent for Americans living in Germany but executing (some of) their work elsewhere. The answer is yes, Germany has an equivalent and it is called “doppelte Haushaltsführung” – “dual household deduction”!
Germany will give you credit for certain household expenses if you have a main family home but commute long distances to your work place and for this reason have another abode available to you in closer proximity to your work. Here are the main differences to the US FHE:
- German law requires you to show that you continue to use your main home. So, keep commuting expenses documented – such as gas bills, train tickets and shopping receipts.
- The German deduction is not location specific. It applies inside Germany and places outside.
- It is not restricted to rent payments, but also allows for mortgage payments to be considered – however the interest portion only.
- It does not have a percentage, but an absolute cap. This cap is €1.000, effectively limiting the overall deductibility in most cases to €12,000 total per year.
Since the two means are obviously different it is possible to utilize them both at the same time. Depending on your total income you may want to use the FHE for your rented German residence when reporting your income to the US. And you may want to take the “dual household deduction” to the maximum extent for your own real estate in the US when flying there for work purposes.
We definitely think these two are a great way of having the tax office help pay towards real estate in both countries! So, please let the taxperts know if renting or owning foreign housing is a situation where you may want or need help!
