Don't Mess With Taxes

Photo by Porapak Apichodilok

You took that job in Rome and things are working out great. But you discovered that there’s one part of the United States that hitched an international ride with you. The Internal Revenue Code.

Thanks to our worldwide tax system for individuals, as a U.S. citizen you remain a U.S. taxpayer, regardless of where you live. That makes you responsible for filing federal tax returns on your overseas earnings.

Uncle Sam, however, does provide some tax breaks to his citizens living and working abroad. They get more time to file, with a June 15 deadline.

And thanks to tax treaties, U.S. taxpayers living around the world also get to exclude some of their income earned abroad from the Internal Revenue Service.

The foreign earned income (FEI) exclusion amount is affected by the cost of living, as noted in Part 7 of the ol' blog's 2025 annual inflation and taxes series. For 2024, it’s $126,500. It goes, thanks to an inflation adjustment, to $130,000 for 2025.

Those annual adjustments also include the cost of finding an acceptable flat, appartement, villa, casa, haus, or any other dwelling in a place with a language beyond my rudimentary translation skills.

Annual housing abroad adjustments: Since costs of living vary widely, the U.S. Department of State tracks the worldwide amounts and grants an allowance to employees officially stationed in a foreign location where the cost of living, exclusive of quarters costs, is substantially higher than in Washington, D.C.

The IRS follows this list and, based on the housing data, allows U.S. taxpayers in those designated locales to exclude from their income (or deduct, if self-employed) an amount greater than the basic housing amount, which for 2024 is $37,950. It’s bumped up to $39,000 for 2025.

This announcement of a bigger housing tax benefit typically is made months after the tax agency's typical fall release of its general inflation figures. Most of those 2025 numbers were released last fall, and are part of the ol' blog's aforementioned Part 7 of the annual inflation adjustments series (shameless plug alert, Part 1 has a full directory of all the posts).

The IRS released this year's allowances for higher housing costs on March 5 in Notice 2025-16, Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2025.

Added international housing adjustments: My previously mentioned prior tax inflation series post — final, I promise, shameless plug: Inflation adjustments that will apply to Americans living abroad in 2025 — goes into more detail on the basic international housing tax exclusion or deduction.

But if you live in one of the more expensive locales cited in last week’s N-2025-16, you get more than the basic annual residential allowance. Again, that's $37,950 for 2024 and $39,000 for 2025.

As the notice says right off the top, "These adjustments are based on geographic differences in housing costs relative to housing costs in the United States."

Of course, since I've dreamed of living in Italy — quick aside: Still waiting, Disney+/NatGeo, for a firm air date for the continued epicurean adventures of Stanley Tucci in Italy), I scrolled down the new notice's table to see which Italian cities are considered overly expensive vis-à-vis U.S. residence expenses.

Five (down from six last year) locales in that Mediterranean peninsula nation get higher housing allowances. They are:

And for all y’all wondering, Vincenza was the Italian city that was dropped this year.

If you're already in or going to Hong Kong, China, you get a housing allowance of $114,300. You get $67,700 if moving to or in Tokyo, Japan. Geneva, Switzerland, expatriates get $102,600.

Closer to home, a residence in Toronto, Ontario, Canada (the most expensive place in our neighbors, and now frenemies under the latest administration, to the north) will get you a housing amount of $57,400. If you work south of the U.S. border (which also is walking a fine line with 47), you're given an allowance of $47,900 for a place in Mexico City.

And if you find in this time when Russia has turned from foe to friend to business partner(?) you move to Moscow, you would get a $108,000 housing allowance for being Vladimir Putin’s neighbor.

Year change choice: Long-time U.S. residents abroad have already noticed that in many places, the foreign housing allowance stayed the same or decreased. Again, that’s because it’s based on comparisons to the U.S. real estate market, which has been hot for a while now.

So, the IRS says that if the limitation on housing expenses is higher for tax year 2025 than the adjusted limitations on housing expenses in last year’s announcement, Notice 2024-31 cited in my foreign housing inflation adjustment post for that year, the IRS will allow qualified taxpayers to apply the adjusted limitations for 2025 to their 2024 tax year.

But wherever in this big old world that your work might take you beyond the locales cited here, you can find out the allowance 2025 amount in the latest IRS notice’s full table that covers about four of the PDF’s nine pages. That will give you an idea of how the housing costs, and their tax considerations, of your new home abroad compares to U.S. residential expenses.

Special considerations for U.S. residents from other countries: Along with the notice on foreign housing expenses, the IRS also last week issued Revenue Procedure 2025-17, which adds Ukraine, Iraq, Haiti, and Bangladesh to the list of countries for tax year 2024 for which the minimum time requirements for individuals electing to exclude their foreign earned income are waived.

Generally, U.S. citizens or resident aliens who are living and working abroad are taxed on their worldwide income. However, if their tax home is in a foreign country and they meet either the bona fide residence test or the physical presence test, they can opt to exclude from their income a limited amount of their foreign earned income (FEI).

Again, the FEI exclusion for tax year 2024 is $126,500. It is adjusted for inflation to $130,000 for 2025.

But individuals who must leave a foreign country because of war, civil unrest, or similar adverse conditions generally are provided the waiver relief. The IRS has determined, as noted in RP 2025-17, that the four nations added to the waiver list meet its relief requirements.

These international/U.S. tax actions are why IRS Notice 2025-16 and RP 2025-17 are this weekend’s By the Numbers figures. They will both be formally published in the Internal Revenue Bulletin on March 24.

You also might find these items of interest:

• Tourist taxes add to international travel costs
• How international taxpayers can get IRS help
• U.S. moves up in latest International Tax Competitiveness Index

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