IRS Sets Larger 2026 Tax Allowances for Expensive Housing Abroad

Key Takeaways

• London allowance $68,600; highest among U.S. expatriate locations
• Milan receives $73,200, the top European housing exemption
• Hong Kong allowance $114,300, the global maximum for 2026
• New Italian city Vicenza added with $40,900 allowance
• Taxpayers can apply 2026 limits to 2025 returns if higher

Pulse Analysis

The IRS’s annual update to foreign housing exclusions reflects inflation and shifting global cost‑of‑living trends. For 2026, the agency lifted the overall housing cap to $39,870 and published city‑by‑city adjustments based on the State Department’s cost‑of‑living data. This mechanism lets U.S. citizens working abroad exclude a larger portion of rent or mortgage expenses, complementing the foreign earned income exclusion that now sits at $132,900.

Among the most notable changes, London’s housing allowance jumps to $68,600, making it the most generous U.S.‑based exemption in Europe. Asian and Swiss markets also see steep increases: Hong Kong’s cap reaches $114,300, Osaka‑Kobe $90,664, and Geneva $116,900. In Italy, six cities qualify, with Milan topping the list at $73,200 and the newly added Vicenza receiving $40,900. These figures directly lower the taxable portion of expatriate compensation, boosting net earnings for high‑paid professionals and multinational firms.

For tax planners, the notice offers a strategic edge: if a 2026 housing limit exceeds the prior year’s amount, taxpayers may elect to apply the higher figure to their 2025 return, effectively retro‑adjusting liability. Companies assigning staff abroad should reassess compensation packages to incorporate the revised allowances, while individuals can optimize deductions or exclusions to minimize U.S. tax exposure. Monitoring future IRS notices will be essential as housing markets evolve and inflation continues to reshape the global cost landscape.