# Foreign housing exclusion when married to an NRA



## elizaswims (Aug 20, 2012)

Hello, I know this is an old post, but it was the only one that came up when I searched the forum for "housing exclusion". I have a related question. I have read the IRS information on the foreign housing exclusion found here: Foreign Housing Exclusion or Deduction but it doesn't seem clear to me whether I will qualify for it or not. My income will be slightly above the FEIE for this tax year so it seems worth doing. The question I have is that my husband is a British citizen and we have joint bank accounts from which we pay our rent. I file "married filing separately" as he doesn't have to file USA taxes (obviously). How do I approach this? On the instructions for form 2555, it says if you are married living in the same foreign household as your spouse and you file separate returns, only one spouse can claim. Does this apply even though we are not filing separate USA returns? Hopefully you understand my question! 

Thanks in advance.

Liza


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## BBCWatcher (Dec 28, 2012)

The two best places to look first for IRS guidance are IRS Publication 54 and the instructions for IRS Form 2555. It turns out this question is pretty easy because, according to Publication 54, your husband does not qualify for the Foreign Earned Income Exclusion, Foreign Housing Exclusion, or Foreign Housing Deduction. He's not a qualified U.S. taxpayer, and he has not elected to file a joint return with you, so he's not qualified for any of these exclusions or deductions. So you never get past that part (middle of page 12 in the 2014 edition of Publication 54, "Requirements"), so you don't have to worry about the "Married Couples" section dealing with separate households, etc. You're good to go, on your own for these purposes.


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## Bevdeforges (Nov 16, 2007)

Moved you to a thread of your own, as I'm sure we have plenty of lurkers with similar questions.
Cheers,
Bev


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## elizaswims (Aug 20, 2012)

Thank you so much, BBCWatcher and Bev. This forum is a great help. I am opting to do them myself this year because last year I used H&R block and they made a few mistakes (and were generally unhelpful). It's wonderful to have some place to get sound advice and explanation. 

Very grateful for expats who are smarter than me!

Liza


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## elizaswims (Aug 20, 2012)

I'm back :/. Having done the worksheet for the housing exclusion, I am a little confused. If I get a negative number on line 33 of form 2555, is that game over...no housing exclusion for me? 

Liza


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## BBCWatcher (Dec 28, 2012)

That's correct. To qualify for the Foreign Housing Exclusion (or Deduction) you have to "thread the needle," as it were. If you have 365 qualifying days (line 31) then your qualified housing expenses have to be above $15,872 (tax year 2014) to get any help in this section.

If you miss you miss, but one thing to check (especially if you're close) is line 28. If you're doing something like taking the qualified housing expenses and dividing by two, assuming your husband is responsible for half, no, that's not correct. The instructions tell you to include qualified housing expenses for your spouse and dependents if they are living with you. Qualified housing expenses include, among other things, your electric bill, so check the instructions there, too, to see if you forgot anything.

But if you're living in a council flat and paying, say, £128 per month total, and that's your total qualified housing expense, then you're going to zero out in this section -- that's just how it works.

Note that you still get to take the Foreign Tax Credit (Form 1116) for your nonexcluded income, and presumably that'll work quite well for you (U.K. tax rates). Also, the fact you have some nonexcluded income could be very beneficial, specifically because you can probably qualify to make U.S. IRA contributions. It's too late to make a 2014 contribution, but if you think your tax situation will be similar in tax year 2015 then you can make a 2015 contribution by April 15, 2016. If you're above the income limit then take a look at the so-called "backdoor Roth IRA."


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## elizaswims (Aug 20, 2012)

Forgot to say thank you BBC Watcher.


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## mwebber (Jun 3, 2014)

Interesting thread. BBC, are you sure you can do IRA if have NRA spouse and do a married filing separately return?


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## BBCWatcher (Dec 28, 2012)

Not a problem at least for a _nondeductible_ Traditional IRA for yourself, assuming you have sufficient unexcluded earned income. You need a joint return if you're going to make a contribution for a nonworking or fully earned income excluded spouse, but then again I haven't found an IRA custodian that knows how to do that for an NRA spouse, so it's probably moot.


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## mwebber (Jun 3, 2014)

BBCWatcher said:


> Not a problem at least for a _nondeductible_ Traditional IRA for yourself, assuming you have sufficient unexcluded earned income. You need a joint return if you're going to make a contribution for a nonworking or fully earned income excluded spouse, but then again I haven't found an IRA custodian that knows how to do that for an NRA spouse, so it's probably moot.



What do you mean non-deductible? I thought the whole idea to do IRA was to reduce the amount of the taxable income? I didn't do this on my previous tax returns as I didn't need IRA to reduce the taxable income, but this may be the case this year, so IRA may benefit my return if I can exclude USD 5,500 from the unexcluded foreign earned income. However, I am not sure I can claim this when I file as married filing separately.


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## BBCWatcher (Dec 28, 2012)

No, not the whole point.

You're thinking of one type of IRA: the deductible Traditional IRA. With that type of IRA you contribute using pre-tax dollars, the balance grows over time (one hopes), and when you make a qualified withdrawal you pay U.S. income tax on the total amount of the withdrawal (principle and gains) at your future tax rate (which might be lower).

Another type is the Roth IRA. You contribute to a Roth using after tax dollars, the balance grows over time, and qualified withdrawals are completely U.S. tax free.

And another type is the nondeductible Traditional IRA. With this type you contribute after tax dollars, the balance grows, and you pay no U.S. tax until your qualified withdrawal, whereupon you pay tax only on the gains at your future tax rate.

Traditional IRAs (deductible and nondeductible) can be converted to Roth IRAs. When you do that you pay tax now (only on the gains if nondeductible) but then enjoy the Roth benefits going forward.

I assume you're not planning to leave this planet tomorrow, and the future matters. IRA contributions are certainly not only about reducing your taxable income today -- that's not the only option. Nondeductible Traditional IRAs are still useful, and they can be converted. (Make sure you understand the conversion/rollover rules if you do that, though. Basically if you already have Traditional IRA funds then your conversion is pro-rated across those funds. You can't pick and choose particular funds to convert within the IRA when converting to a Roth. The IRS does that for you if you convert less than the full Traditional IRA balance to a Roth IRA.)

In fact, working in the U.K. is a very good time indeed to be contributing after tax dollars, not pre-tax. That's because of the Foreign Tax Credit. Your current U.S. tax rate is likely to be zero (or near enough), and you can't really beat that. Your future U.S. tax rate is bound to be higher. So after tax contributions now are great stuff. Deductible IRA contributions would only be deductible from U.S. reported income, not U.K. reported income.


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## mwebber (Jun 3, 2014)

Thank you for the explanation. So, you cannot deduct IRA contribution (traditional deductible IRA) if file MFS?


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## BBCWatcher (Dec 28, 2012)

Theoretically you can, but the income limit is super low, so not in your case (and basically never if you're taking the FEIE).

The nondeductible Traditional IRA is the only one of those three without an income limit.

Did that explanation about why you want after tax IRA contributions when working in the U.K. (or in another comparatively high income tax country) sink in yet?


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## Bevdeforges (Nov 16, 2007)

I think you may be thinking of the Roth IRA, which, when they were first initiated had a restriction that you couldn't open one if you filed MFS. That restriction was lifted several years back. 

For a traditional IRA, it's not a matter of being married to an NRA or filing MFS, but rather the amount of taxable earned income (i.e. salary) you have. If you exclude your entire salary (using the FEIE) then you can't contribute to an IRA, no matter what your filing status.
Cheers,
Bev


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