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U.S. EXPAT TAX GUIDE – BRAZIL

How can US expats in Brazil use the Foreign Housing Exclusion?

The Foreign Housing Exclusion (FHE) allows US expats living in Brazil to deduct certain housing expenses from their taxable income. These expenses can include rent, utilities, household repairs, and even residential parking.

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However, the IRS sets a maximum limit on how much you can exclude, which depends on the city you reside in.

What is the maximum amount I can exclude for housing expenses?

The foreign housing exclusion limit varies based on your location. 

For instance, in São Paulo, the IRS has set the maximum exclusion at approximately US$56,600. Before claiming this amount, you must subtract the base amount, which the IRS considers the minimum typically spent on housing in the United States.

For 2024, the base amount is US$19,200. If your housing expenses are US$50,000, you can only exclude US$30,800 from your taxable income (US$50,000 minus the base amount of US$19,200). 

You can refer to IRS guidelines to see the specific limits for your area.

How do I apply for the foreign housing exclusion?

To claim the foreign housing exclusion, you need to complete IRS Form 2555 along with your US tax return (Form 1040).

  1. Eligibility Requirements: Confirm that you meet the requirements by either passing the bona fide residence test or the physical presence test.
  2. Complete Form 2555:
    • Part I: Enter your personal details and information about your foreign residence or physical presence.
    • Part VI: Calculate your foreign housing exclusion by listing eligible housing expenses, such as rent, utilities, and insurance, and determine if any expenses exceed IRS limits.
    • Part VII: If you are also claiming the foreign earned income exclusion, you need to calculate and report it here.
  3. Attach and File: Attach the completed Form 2555 to your Form 1040 when filing.
  4. Submit Your Tax Return: File your tax return by the deadline, typically April 15 or June 15 if you live abroad. Extensions are available if needed.
  5. Keep Records: Maintain detailed records of your housing expenses and proof of residency, as the IRS may request documentation to verify your claim.

How much total income can I exclude from taxes using these exclusions?

In 2024, you can combine the Foreign-Earned Income Exclusion of US$126,500 with the Foreign Housing Exclusion of US$30,800. 

Depending on your situation, it is possible to exclude up to US$157,300 of income from US taxation. Any income earned above this amount will still be subject to US taxes.

What do I need to qualify for the housing exclusion?

To qualify for the foreign housing exclusion, you must meet one of the following tests:

  • Bona Fide Residence Test: You need to establish residency in Brazil for an uninterrupted period that includes an entire tax year. This test is about demonstrating that Brazil is your primary residence and involves more than just spending time in the country.
  • Physical Presence Test: You need to be physically present in Brazil (or another foreign country) for at least 330 full days within any consecutive 12-month period. Unlike the bona fide residence test, this test is strictly based on the number of days spent abroad, without regard to your intentions.

Which expenses are covered by the foreign housing exclusion?

The foreign housing exclusion covers certain housing-related expenses, such as rent, utilities (excluding telephone charges), property insurance, and residential parking. However, some expenses are not eligible:

  • Mortgage Payments: Principal and interest on mortgage payments cannot be excluded.
  • Luxury or Extravagant Expenses: Lavish or excessive costs are not eligible.
  • Costs for Purchased Property: Expenses related to purchasing a home, like down payments or mortgage interest, are not covered by the exclusion.

Can both spouses apply for the foreign housing exclusion?

Yes, both spouses can claim the foreign housing exclusion if they each qualify by meeting either the bona fide residence test or the physical presence test. Each spouse must have separate housing expenses and must file their own Form 2555 to claim the exclusion.

What if my spouse is not a US citizen?

If your spouse is not a US citizen, resident, or green card holder, they cannot claim the foreign housing exclusion. Only US citizens and eligible residents can use this exclusion. 

However, if you file jointly and your spouse elects to be treated as a US resident, they may qualify, provided they meet all necessary requirements. 

If filing separately, only the US citizen or resident spouse can claim the exclusion, and only their portion of shared housing expenses can be claimed.

Can I claim other deductions alongside the foreign housing exclusion?

Yes, US expats can claim other deductions in addition to the foreign housing exclusion. For example, you can also claim the foreign earned income exclusion, which helps reduce your taxable income by excluding a portion of your foreign earnings. 

Additionally, certain itemized deductions, such as student loan interest or retirement contributions, may also apply if you qualify. It’s important to understand how these exclusions work together to maximize your tax savings.

What happens if I exceed the exclusion limit?

If your housing expenses exceed the foreign housing exclusion limit set by the IRS, you cannot exclude the extra amount from your taxable income. Anything beyond the limit will be counted towards your taxable income. 

This means that if your housing expenses are significantly high, you may end up with some of those costs being subject to US taxation.

Is it possible to amend my tax return if I forget to claim the exclusion?

Yes, if you forget to claim the foreign housing exclusion, you can amend your tax return by filing Form 1040-X, the Amended U.S. Individual Income Tax Return. 

You generally have up to three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, to make corrections. 

It’s a good idea to consult with a tax professional if you need help amending your return to ensure all necessary documentation is included.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

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