One notable change from The Tax Cuts and Jobs Act of 2017 (TCJA) was the limitation of the state and local tax deduction on Schedule A. For those itemizing deductions, the maximum deduction allowed is capped at $10,000 per year, effective on your 2018 tax return. This includes taxes such as real estate tax, personal property tax and state income tax. Before TCJA, those living overseas could also deduct their foreign real estate taxes. Under the new regulations, foreign real estate taxes are no longer allowed to be deducted as an itemized deduction on Schedule A.
Does this mean those expenses are essentially a lost tax deduction? Perhaps not. For those living and working overseas, you may be able to exclude from income a portion of your foreign earned income and foreign housing expenses, using Form 2555. Some examples of qualified foreign housing expenses include rents, some utilities, property insurance, parking, repairs, etc.
In the past, foreign real estate taxes were not included when figuring your foreign housing expenses on Form 2555, since they were allowed as an itemized deduction on Schedule A. Since they are no longer allowed on Schedule A, does that mean they are now available to be reported on Form 2555? Some tax professionals believe the denial of the deduction on Schedule A now frees up the expense to be included with the foreign housing expenses. So, stay tuned for any further guidance that may be forthcoming. Don’t forget, if you rent your foreign property and complete a Form Schedule E, qualifying applicable real estate taxes for the foreign rental may not be subject to the itemized deduction limitation rule.
Please consult with a qualified tax professional. This information is general in nature and should not be relied on.
Jill A. Helm, CPA