In addition to the foreign earned income exclusion, taxpayers may also claim an exclusion or a deduction from gross income for an expenditure for housing if the home of the tax is in a foreign country and they qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.

The housing exclusion applies only to amounts which are treated as paid by an employer, which includes any amounts paid to a taxpayer or paid or incurred on a taxpayer’s behalf by his or her employer that are taxable foreign earned income for the year. In contrast, the housing deduction applies only to amounts paid for with earnings from self-employment. Thus, the source of the amounts paid typically determine use of the deduction or exclusion.